Witnesses
David Gauke MP, Exchequer Secretary, Her Majesty’s Treasury Steve Hughes, Economic Adviser, British Chambers of Commerce Sam Mitha, Assistant Director, Her Majesty’s Revenue and Customs David Owen, Head of National Insurance Policy, Her Majesty’s Treasury Priyen Patel, Policy Adviser, Federation of Small Businesses Chris Pichon, Chief Executive, Wenta Public Bill Committee  Thursday 2 December 2010  [Jim sheridan  in the Chair] 1 pm 
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Public Bill Committee

[Jim sheridan in the Chair]

Jim Sheridan: Before we begin, I shall read out a brief introductory statement and make a few preliminary announcements.
Members, if they so wish, can remove their jackets during the Committee meetings. Would all Members please ensure that mobile phones, pagers, etc. are turned off, or switched to silent mode, during the Committee meetings?
As a general rule, I and my fellow Chairs do not intend to call starred amendments that have not been tabled with adequate notice. The required notice period in Public Bill Committees is three working days. Therefore, amendments should be tabled by the rise of the House on Monday for consideration on Thursday and by the rise of the House on Thursday for consideration on Tuesday.
Not everyone is familiar with the process of taking oral evidence in Public Bill Committees, so it might help if I briefly explain how we will proceed. The Committee will first be asked to consider a programme motion on the amendment paper, debate about which is limited to half an hour. We will then proceed to a motion to report written evidence and then to a motion to permit the Committee to deliberate in private in advance of the oral evidence sessions, which I hope we can take formally.
Assuming that the second of those motions has been agreed to, the Committee will then move into private session. Once the Committee has deliberated, the witnesses and members of the public will be invited back into the room, and our oral evidence session will begin. If the Committee agrees to the programme motion, the Committee will hear oral evidence this afternoon.
On the question of the programme motion, the amendments tabled in the name of the hon. Member for Scarborough and Whitby (Mr Goodwill) are intended to remove the names of organisations that are not able to send representatives. Since the amendments were tabled, two further witnesses have had to drop out because of the bad weather: Hampshire Chamber of Commerce, which was due to replace Southampton Chamber of Commerce in the original list; and the East London Small Business Centre. That leaves Wenta alone in the second panel.
Therefore, in order that amendment (b) on the amendment paper should reflect the current situation, I suggest that the Whip moves it in amended form—namely, leaving out Cambridgeshire Chamber of Commerce, Southampton Chamber of Commerce, Portsmouth Chamber of Commerce, London First and East London Small Business Centre.

Motion made, and Question proposed,
That—
TABLE

Date

Time

Witness
Thursday 2 December
Until no later than 2.30 pm
British Chamber of Commerce;
Federation of Small Businesses; London Councils
Thursday 2 December
Until no later than 3.30 pm
Cambridgeshire Chamber of Commerce; Southampton Chamber of Commerce; Portsmouth Chamber of Commerce; London First; East London Small Business Centre; Wenta
Thursday 2 December
Until no later than 4.00 pm
Treasury; HM Revenue and Customs

Amendment made: (a), in the table, in the third column, leave out “; London Councils”.—(Mr Goodwill.)

Amendment proposed: (b) in the table, in the third column, leave out
“Cambridgeshire Chamber of Commerce; Southampton Chamber of Commerce; Portsmouth Chamber of Commerce; London First; East London Small Business Centre;”.—(Mr Goodwill.)

David Hanson: May I welcome you to the Chair, Mr Sheridan? The Opposition are content with the proposed amendment.

Amendment agreed to.

Main Question, as amended, put and agreed to.

Ordered,
That—
TABLE

Date

Time

Witness
Thursday 2 December
Until no later than 2.30 pm
British Chamber of Commerce;
Federation of Small Businesses
Thursday 2 December
Until no later than 3.30 pm
Wenta
Thursday 2 December
Until no later than 4.00 pm
Treasury; HM Revenue and Customs

Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Mr Goodwill.)
Written evidence to be reported to the House
NI 01 Wenta
NI 02 Thames Gateway London Partnership
NI 03 Her Majesty’s Treasury
NI 04 East London Small Business Centre
NI 05 Hampshire Chamber of Commerce

Resolved,
That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Mr Goodwill.)

The Committee deliberated in private.

On resuming—

Jim Sheridan: Good afternoon. Thank you for coming along. We will now hear oral evidence from the British Chambers of Commerce and the Federation of Small Businesses. For the record, please introduce yourselves to the Committee.

Steve Hughes:  I am Steve Hughes, and I am an economic adviser at the British Chambers of Commerce.

Priyen Patel:  I am Priyen Patel, a policy adviser at the Federation of Small Businesses.

Jim Sheridan: Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill and we must stick strictly to the timings of the programme motion that the Committee has agreed. I hope that I do not have to interrupt mid-sentence, but I will do so if need be.

Q 1

David Hanson: I welcome both witnesses to the Committee.
My opening question is to Mr Patel and Mr Hughes in turn. Do you feel that a payment holiday for new businesses and, generally, for businesses with fewer than 10 employees is a good idea?

Priyen Patel:  The principle of the idea is to promote job creation in new, young and small enterprises. It is obviously a very good idea, and we supported it when it was announced by the Conservative party before the general election. In a perfect world we would have tweaked it and we would have probably gone a little further, which you would probably expect us to say. For the time we are in, and with the fiscal constraints that the Treasury is working under, we think the Bill is very good. The principle of the idea is very good.

Steve Hughes:  There is not much to add to that. If you are in a situation in which you are trying to engender a culture of employment, you have to look at ideas that are, in essence, a little experimental and perhaps more radical than normal. There are, as Priyen said, issues surrounding the establishment of businesses, the age of businesses the scheme applies to and also the geographical areas it applies to. The fundamental principle of trying to encourage employment among our businesses is a good one.

Q 2

David Hanson: Do you have a view as to whether the absence of London, the south-east and the eastern region is positive or detrimental to the overall acceptability of the scheme and the positive nature of the scheme that you have expressed for both your organisations?

Priyen Patel:  As I said, in a perfect world we would have liked this policy to be applied to all of the UK, including the south-west, the east of England and London, because there are pockets within those regions that obviously have high unemployment, or could do with a boost to the private sector. Secondly, we would have gone a little bit further and seen what the capability and capacity was to extend it to microbusinesses, businesses that are currently trading, and may have experience of hiring and are in the marketplace at the moment. But that is in a perfect world. At the moment is it detrimental to those areas? I am not sure it is, but in a perfect world it would obviously be very beneficial if it had been rolled out to those three excluded areas.

Steve Hughes:  The fiscal impact of the measure is the crux of the problem. If you extend it to those regions, there is a fiscal impact of around £650 million. The problem associated with any area of policy is that we have to keep a tight rein on these things at the moment. It is all very well saying £650 million here or another policy area taking a fiscal impact of another few million pounds there, but given the situation with the deficit and certainly the approach adopted by the coalition Government, these are the regions that can better absorb economic shocks, have greater economic activity and greater capacity for private sector employment, so it seems natural that if any areas were to be excluded it would be those.

Q 3

David Hanson: The Government have argued that this scheme is to support areas where there are high levels of public sector employment that will be hit by redundancies and job losses. Statistics show that 23 of the top 100 constituencies for public sector employment are in London, the south-east and east. How do you think your members in those areas will react when they are defined, according to the Government’s own definition, as a high public sector area yet they will not be able to apply to a scheme that will help with deprivation and advance the Government’s stated objective. Do you have any views on that?

Steve Hughes:  Yes, certainly. We can all point to areas where there are higher levels of public sector employment and where the scheme does not apply. In policy terms context is everything and if you look at the regions outside the south-east, the eastern region and London, those are the areas that are most dependent on public sector money, first and foremost. It is not just about the narrow definition of pure employment. The figures for the contribution to gross value added in those areas of public sector employment to which the scheme applies are much higher than in the three regions that are exempted.

Priyen Patel:  I would just add one point. Our members, and Steve’s members too, do not define themselves as a business in a certain area. They define themselves as businesses that are providing goods to their marketplace, essentially. Their marketplace could be in one area. It could be in one region. It could be in one constituency. But for many businesses, their market footprint is actually quite large and will cover perhaps two or three regions and numerous constituencies.

Q 4

David Hanson: Do you have any view as to the competitive nature of the proposal in relation to those regions, particularly on the borders of regions where there could be companies on one side of the border that qualify and companies on the other that do not but which are operating in the same market?

Steve Hughes:  I think there is a potential behavioural effect. Ultimately the policy is in part experimental. When the Treasury comes to analyse what happened with the policy and the jobs it created and its behavioural effects, that is something that clearly needs to be looked at. There are competition issues around that. We fully recognise that there is a potential issue around whether companies locate in a certain area rather than another because of the holiday. But again it is about the not easy decision of cost versus benefit. You may have to take as part of the policy cost potential competition issues at a local, sub-regional level.

Priyen Patel:  It will obviously have some behavioural impact on people who are looking to start up a business and looking to employ people almost from the first day. The other thing businesses will look at when they are looking to start up a business is where they can start up—where they should start up. That could be infrastructure or a skills base. This obviously provides an incentive for them to start up a business that will employ people very quickly, in a certain area or not in a certain area.
Businesses tend to employ people when there is added demand to the company—when invoices are becoming greater in volume and when they are looking to expand. That is obviously something that will provide a fiscal incentive, but it is a fiscal incentive that is, as Steve has mentioned, quite experimental. I do not know of any other tax, or incentive in the form of tax, that is regionally based. Most taxes cover most of the country. It is an interesting experiment, but I think it will have some behavioural impact on businesses.

Q 5

David Hanson: Just one final question from me, because I know that other colleagues want to come in. Do you have any current awareness of the total amount of resource the Government have put into the scheme for your members as a whole? I am interested in whether, if you had that awareness, you would use that resource in a different way to help support your members.

Priyen Patel:  By resource do you mean just money?

Q 6

David Hanson: The scheme will cost an amount of money; the Government have estimated between about £900 million and £1 billion. The potential amendments that we have included could increase the resource and divide it in different ways. If that resource was available to you to plan for supporting small businesses and chambers of commerce generally, would you would think of using it in a different way?

Priyen Patel:  I think that £900 million would be a good amount to give. Looking at a policy such as this, we might have looked at reducing the number from 10 to maybe five, and then stipulating that for businesses that are already in existence—maybe for just a number of years—the next three employees or the first three employees they hire would also receive this type of help. The principles are still the same; it is just a little tweak to the policy. That is the only difference I would make.

Q 7

David Hanson: Just out of interest, have you made any representations to the Government in the development of the scheme about those issues? Have you put them on the table?

Priyen Patel:  Before the general election we spoke to advisers and shadow Ministers. Afterwards we did the same, and we have spoken to a Treasury official about it as well.

Q 8

Mel Stride: May I clarify something that I think you both said earlier? You recognised that to roll the scheme out to the other three regions, which are currently proposed to be exempted, would cost about £650 million out of a scheme that will cost about £940 million in total. Are you saying that in your view, taking into account the fact that we have to get the deficit down and the needs of those three regions, it would not be a good idea to spend that additional £650 million in that way?

Steve Hughes:  I would return to what I touched on earlier, which was essentially that if you, as a representative group such as we are, talk to civil servants and officials about policy implementation that costs money the question now comes back—quite rightly so—“How are you going to pay for it?” If we were to use that £650 million for this scheme, it would not be available for possible infrastructure spending, capital spending or other elements of the business policy world that we see as vital and as part of the package that will help economic recovery. Again, it goes back to the point that, taking the behavioural effects of the boundaries of the exemption into account and looking at household spending statistics, birth and death rates and the business statistics that were released yesterday, those three regions were historically, and still are, the main drivers of UK growth. They will be able to absorb economic shocks in a more robust manner than the other regions, which are more dependent on public sector spending, and they will continue to do so. They will drive recovery and drive out of the recession or downturn quicker than those other regions. When there are limited resources, it is better to focus them on the regions most in need.

Priyen Patel:  I do not have a great deal to add to what Steve has said. As you can imagine, all businesses—small, medium or large and wherever they are based—are competitive by nature. Business people are like that. If a business is based in London or the south-east and a policy like this is presented to them, the first two questions they will ask are, “Why am I not eligible?” and, “Why is my region not eligible?” As Steve said, GVA records and historical factors show that private sector growth and drivers in these areas are quite strong. The principle behind the Bill is obviously to boost private sector economic activity in the other regions.

Q 9

Mel Stride: The national insurance holiday is basically permissive, in a sense, rather than prescriptive. In other words, companies have to actively apply for it, rather than being given it when they set up, which then brings into play this whole issue of how it is advertised and marketed as a scheme. My concern, or one of the concerns that I might have, is that we don’t get the message out effectively, so I would very much value comments from both of you on how you think we should ensure that new start-ups are very aware of what is on offer here.

Steve Hughes:  It is a very important point. I can point to examples throughout the stimulus package where recession-specific measures such as the enterprise finance guarantee and the trade credit insurance scheme were potentially—certainly in their infancy as a policy—not necessarily as successful as they could be, because of the communication of their availability to the business community.
I can give you other examples as well. We sent in freedom of information requests about national minimum wage advertisements for the change in its rate, and, in 2008-09, £874,000 was spent on advertising to the business community the national minimum wage uprating. Last year, it was £850,000. So far, there has been no resource allocated to change for next year. In the fiscal environment, there is a question of how much money is dedicated to ensuring that the business community is aware of that. It is not just about resource from central Government; representative bodies also have a responsibility to highlight these changes, as do things like Business Link and the end of the regional development agencies and the creation of the local enterprise partnerships. It is through all those channels that it has to be communicated.
I have seen Government policies where those channels haven’t necessarily been utilised, but if the Government want to get the most out of it, you properly use every available resource to ensure that the business community, and certainly those who are just starting up, know about it.

Q 10

Mel Stride: On that point, do you think that using LEPs—they are emerging now—Business Link, and so on is a good enough channel to get the message out? Or do you sense that there is something wider that needs to be done here?

Steve Hughes:  On LEPs, possibly not, because they’ve only just been created. They’re only just getting into how they’re going to be organised, meet and operate after their bids have been accepted, so, given that this policy is already in play, perhaps they will be the perfect vehicle to advertise it in a year’s time, but certainly not now.

Priyen Patel:  I have one thing to add to that. I have examples, and I’m sure that Steve has examples as well, of businesses that have started up since the emergency Budget—I can think of one that has even employed someone—but had no idea of this policy until I proactively told them. I’m sure that there are numerous cases of that.
The promotion of this scheme is vital. I checked on the HMRC website this morning, and there is a little box right down in the corner, which you have to scroll all the way down to find, but it doesn’t actually say what it is. You click on it, and then you have to go through a whole process. It needs to be promoted, because it is good policy, and, as Steve said, LEPs probably aren’t the place for this to be looked at—local authorities, perhaps. It is up to the Treasury to be creative and innovative in a tight fiscal environment, and to ensure that small businesses, or new businesses, look at the scheme. For example, 72% of our members use accountants. They start talking to accountants almost from day one. Perhaps the Treasury should start looking at accountancy, trade bodies, or the ongoing training that accountants do to plug the scheme.

Q 11

Christopher Leslie: Thank you for your comments so far. I am interested in picking up the question about the awareness of the scheme among potential new businesses. I would normally ask whether any of your existing members had made inquiries with you, but I assume not because new businesses would not yet be your members. Would it be a good idea to require all communication, literature, websites, mailings or whatever, that HMRC has with new business start-ups to have a clearly marked section or a link to a website to market and promote the scheme?

Steve Hughes:  Obviously, in the interface between HMRC and businesses, as Priyen said, quite a lot of the time it is between accountants acting as agents of behalf of businesses, and HMRC. The message should be getting to them anyway. I can give another example of the way in which a recession-specific scheme has benefitted businesses. The time to pay scheme was well advertised through HMRC. It was an existing scheme, but it was beefed up in a time of tight credit and many more businesses utilised it as a result. HMRC is the perfect vehicle for that.

Priyen Patel:  HMRC sends a lot of information to people who are HMRC-bound, whether that is through employment, through changes, through CD-ROMs and all the rest. It is not about an increase in the number of letters from HMRC, because those mailshots probably cost a lot of money. It is about utilising the mailing and information that HMRC proactively sends out, to ensure that the scheme is actively and thoroughly promoted.

Q 12

Christopher Leslie: I do not know whether sufficient thought has been given to the design of the scheme and its promulgation to make people aware of it. You made a point about minimum wage advertising, and I do not know whether enough has been put into that. Have you seen the suggestion in the regulatory impact assessment that apparently 240 HMRC staff are to be dedicated to the promotion and administration of the scheme? Do you have a sense of whether that is sufficient or whether, in your experience, getting through to HMRC and getting information for your members has always been sweetness and light and straightforward? Have there been difficulties for your members in the past with similar schemes?

Steve Hughes:  In terms of the 240 staff and the impact assessment, as I understood, that was not broken down into how much will be in stakeholder engagement, as opposed to the general administration of the scheme’s operation. Certainly, the principal Government Departments that we work with, such as the Government Equalities Office, the Department for Business, Innovation and Skills, the Treasury and HMRC, have stakeholder engagement. They have specialists and people whose job it is to engage with the business community and get things out there. Some of those stakeholder engagement functions are naturally more effective than others, and it requires leadership from those Departments that sponsor them, such as HMRC, to ensure that the message gets out.

Q 13

Christopher Leslie: Would your organisations be willing to be contracted to do some of that marketing and promulgation?

Q 14

Christopher Leslie: Do you think the NI holiday proposal will create jobs? Economists talk about the dead-weight cost of money that will go into business, which would have already created those jobs anyway. Will it create extra employment?

Steve Hughes:  I think that there are two elements to that. The first, in one sense, relates to the 800,000 people in the impact assessment to whom it would apply. Even the businesses that take on those 800,000 people will have extra resource to allocate how they wish as a start-up company, which could be for investing, advertising, marketing or whatever they want. That is a fundamentally good principle to follow for a start-up business, allowing it to have the freedom to do that.
Whether it will create new jobs is a difficult question. I have no doubt that some start-ups will be incentivised to take on people, and the national insurance holiday will be one of a number of factors that a business start-up uses in trying to take on staff. So, it is difficult to say whether it will on its own, but it will certainly contribute to a beneficial outcome for the employment market.

Priyen Patel:  Before the election, when the previous Government were going to put national insurance up by 1%, we calculated that that would cost 57,000 jobs. So, it has a negative impact. We also asked before the election, “What trigger points would lead to an extra employee?” We did not ask, “What would you like as an everyday cut in a rate, or investment in something?” but “What would actually trigger you to employ someone?” Some 60% said that a cut in employee costs would incentivise them to take on employees. However, it is important to remember that businesses will not employ someone for the sake of it; there has to be that demand, extra invoices, and extra orders coming into the business for it to go and get someone.

Q 15

Christopher Leslie: Would it be a more flexible design of a scheme if, rather than accounting for even the person on the smallest number of part-time hours, businesses were allowed to aggregate somehow to allow the full-time equivalent? So, essentially, they would not be penalised for having lots of part-timers. Obviously, new start-ups will not necessarily take on full-time staff straight away, but they might lose out on some of the NI holiday relief, simply by virtue of having part-timers. Do you think that there should be a proposal that would allow the full-time equivalent in aggregation to count, in order to maximise the relief?

Priyen Patel:  Yes is my answer, but I can understand the complexity for both the applicant—the business—and HMRC. If that can be overcome, yes, it should be, because head count is what really matters. However, I can envisage there being quite a lot of complication in doing that.

Steve Hughes:  I would echo that. Compliance costs of dealing with tax affairs takes time away from core business activity and if, as you outlined, that could be designed in such a way to cope with that issue, it could be an option.

Q 16

Matthew Hancock: Does the fact that this scheme is designed to apply to new businesses mean that communicating it—and, I think we all agree that communicating this is an important part—would, in a sense, be easier? That is because when a new business comes to interact with the tax system for the first time, the scheme applies, which is rather unlike the minimum wage legislation, where you have to talk to existing businesses that have already been implementing the bureaucracy in a certain way. The first time a business asks, “How do I have to comply with the tax system?” is the point at which the Bill will have an impact on it.

Steve Hughes:  First, not all start-ups will be people entering the business world for the first time. People may have preconceived ideas because of how they have set up previous businesses, and they may try to apply them. There is a different make-up of the base of the start-ups that exist in the UK, but I agree that there is potential for the lines of communication to be easier if those businesses are going to Business Link, for example, and that kind of thing. Then again, that all depends on the quality of advice that is given.
One of the problems with the enterprise finance guarantee was that the communication down through bank hierarchies was not as good as it should have been, so business advisers with the banks did not necessarily have the information to give to businesses on the option of that scheme. Therefore, if the Business Link representative or other representative does not have the knowledge of the scheme, the interaction will not work.

Priyen Patel:  It is that point of HMRC being a bit creative with this, because targeting existing businesses is not easy, but it is easier than targeting those businesses that have just started, or are in the process of starting. Looking at current Government policy, one of the new initiatives is the mentoring scheme. Have HMRC and BIS been communicating about that? As Steve mentioned, banks are a port of call when a business starts up. The business goes to a bank and it usually gets the small and medium-sized enterprises start-up box. The question is what communication has happened between HMRC and the banks within that box, to ensure that that information covers the initiative as well.

Q 17

Matthew Hancock: My other question is on the savings on administration. Both of you have mentioned how complex it is to comply with the tax regime. Have you made any estimates of the positive impact that this will have in terms of reduced bureaucracy for start-up companies? I appreciate that they will still have to pay some taxes.

Priyen Patel:  We have not done any analysis yet.

Steve Hughes:  In terms of the cost of compliance, it relates to different elements, such as familiarisation with the scheme and making deductions separately from what they would normally do for NI anyway. There is an administrative burden for those companies. Obviously, when they come to research the scheme and decide whether to apply for it, that time constraint will factor into their decision.

Q 18

Matthew Hancock: So you do not think that it will make it easier for new businesses to comply with the tax system, because this is one less tax that they will have to comply with.

Steve Hughes:  No. Ultimately, you have a situation where there are so many different reliefs and allowances that, if you are a start-up business, you will still have to learn about compliance with the tax system. You may have payroll software that does it for you, but as Priyen said, if you are a start-up you generally have an accountant who should be able to do it for you.

Q 19

Gavin Shuker: Mr Patel, you said that the previous plans before the election would have cost 57,000 jobs. Do you have that information by region?

Priyen Patel:  We have that information by turnover of business, and I think that we have it by region—yes, we do.

Q 20

Gavin Shuker: Okay. How many jobs would this cost in the east, the south-east and London?

Priyen Patel:  I can provide that data back to the Committee.

Q 21

Gavin Shuker: But you would accept that it is a proportion of that 57,000?

Priyen Patel:  Yes, it is. That information, however, was based on a 1% increase in NICs, not on any other policy.

Q 22

Gavin Shuker: Would you accept that this policy would be detrimental to new businesses starting up in the east, the south-east and London?

Priyen Patel:  It would not be detrimental, because they are not losing anything. It would obviously impact on a business when it is starting up, and when it is looking at employing its first person. It would have a behavioural impact on where it locates and what employment intentions it has. It comes back to the point that this proposal could be for £5,000 or £15,000, but the business will only employ someone if there is demand. You can incentivise quite a lot, and that will have an impact on employment intentions, but the biggest driver to employment—or loss of employment—is business activity and demand coming into the business. When demand drops off, that has an impact on employment intentions.

Steve Hughes:  In terms of firms being at a disadvantage and the exempted areas, I go to chambers of commerce all over the country, and given the make-up of the businesses that I see operating in those communities, I struggle to see necessarily how the holiday as designed will act to put one firm at a massive competitive advantage over another. That is unless, as we say, those effects become more concentrated and acute as you get closer to the boundaries, as I imagine they would.

Q 23

Gavin Shuker: Assuming that the whole country cannot benefit from a blanket holiday, at what level should the exemption apply? Should it be at regional level, LEP level, constituency level or local authority level?

Priyen Patel:  As I have said, I do not know of any other fiscal measure that is broken down in this way—in the old RDA way, if you like. It is quite an experiment, and I am not sure whether we would want to go a step further without looking, perhaps a year or two years into this, at what the uptake and the usage are and at what the advantages or comparative disadvantages have been to businesses in the area and outside it. Would I want it to go below hand? I will take the chicken’s answer and reserve my judgment until this is a couple of years in.

Steve Hughes:  Yes, my view is pretty similar. As we keep saying, this is setting a new precedent in terms of regional policy in a sense. If you are going to try to foster growth and to rebalance—that is obviously a bit of a buzz word at the minute—towards those regions that struggle in comparison with the ones that are exempted, you have to come up with ever-more radical policies, which may require differentiation in fiscal policy and other policies, such as regulatory policy.

Q 24

Gavin Shuker: Do you think that all the measures before us will have a significant effect in terms of rebalancing the economy in areas with high public sector employment?

Steve Hughes:  I can answer that. I think that this is one of a number of measures that need to be taken. If you take it in the context of, say, things such as corporation tax reform, an essentially pro-business message is being given out. Possibly, we need to go further and to look at exemptions on elements of the regulatory regime—planning, for example. We could look at new-generation enterprise zones in areas that struggle to generate private sector employment. That is why I go back to what I said before, which is that when you talk about rebalancing, it has to be ever-more radical; there is not necessarily an easy answer under existing policy mechanisms.

Priyen Patel:  Hopefully, that will lead to the Treasury and the Government as a whole becoming slightly more creative and slightly more innovative in policy making. One thing that the Prime Minister before the election said when he visited Northern Ireland was that we could look at making it an enterprise zone. That would obviously imply different criteria for regulation, planning, the tax regime and perhaps capital investment, which would be slightly different from other regions of the UK. This is a creative policy, and being a bit creative, without being too creative, let us say, is welcomed, but because it is very new and very different, it needs some analysis after it has had some run.

Q 25

Gavin Shuker: Are you confident from what you have heard from the Government and from your previous experience of other schemes that we have seen in recent years that there will be effective analysis of the data as the scheme goes through?

Steve Hughes:  I have worked on regulation policy for quite a while now, and something called post-implementation review is not necessarily carried out as a matter of course by Government Departments when it should be. There needs to be more robust implementation of that approach of analysing policy, its suitability, how it can be developed and how it can go forward. Without that, what is the point really? The whole point of the impact assessment process in the first place is to ascertain the cost and benefit of each policy. Again, we are going slightly blind into this because it is unprecedented, so it obviously requires some analysis.

Priyen Patel:  As I said, we need analysis—probably quite a lot of analysis—a year or two years into the scheme. In a meeting that I had, a Treasury official, who I think is sitting somewhere behind me, said that they will be looking at this a year in. We will be doing an independent piece of research looking at this—probably a year from now as well—to see what the uptake has been and what the advantages and disadvantages have been, and we will share that with the Treasury. Hopefully, they will be doing the same.

Q 26

Gavin Shuker: Finally, it sounds from your answers as if you believe that these initiatives can be welcomed, but will not make a significant difference to rebalancing the economy in the affected areas.

Priyen Patel:  One policy on its own is never going to do that. There needs to be a package of policies. As Steve mentioned, there needs to be capital investment and work on regulation and planning. The fiscal policy regime is obviously very important as well. It is a package, and in his autumn statement, the Chancellor announced that he would go away and look at the other barriers to growth and what incentives and measures can be taken. That is very welcome. It is a package; it cannot be one policy on its own.

Q 27

Mel Stride: I want to go back to the issue of the potential complexity of the scheme’s administration for employers that take it up. The impact assessment suggests there will be £75 million of cost across the companies that might be expected to take this up. Do you feel that, in the context of the various things that companies are doing in terms of tax administration, and so on, this is potentially a highly administratively onerous scheme? Or is it at a low level? Where would you place it? To the extent that it is onerous, how might it be made less so?

Priyen Patel:  I can understand from businesses’ point of view that they would probably want this policy done automatically. A business takes on a member of staff, puts their files into HMRC and it is done magically by HMRC. I can understand why that cannot be done and why the complexity for HMRC would be too great—the costs for HMRC would probably be too great. On a scale of other things compared with this, I do not see it being overly burdensome to a business. There are certainly other things that are much more burdensome.

Steve Hughes:  Businesses will take the administrative burden into account when they decide whether to adopt the scheme. I cannot see that burden acting as a disincentive to companies.

Priyen Patel:  I should have mentioned one other thing, which is the retention of records from previous years. Most businesses would, I hope, do that anyway, and their accountants would ensure that such systems are in place. If it leads to businesses having to keep records on file or on computer, it is good business practice, even though it may be a slight burden.

Q 28

Mel Stride: As I understand it, the Bill creates a need for employers to establish that there is no contravention of EU regulations in terms of regional subsidies being applied. No company is allowed to have more than £200,000 over a three-year period as a result of being in one region rather than another. Can you comment on that? Do you think many companies will be caught up in that? Do you think it is something that all companies will have to think about and, therefore, will be onerous in terms of the administration?

Priyen Patel:  In terms of EU state aid rules, £200,000 would be a huge amount for a business to receive, especially a new business, unless it was getting a huge sum from another Government-funded source. I do not think that it will be a problem for many businesses. Many businesses will not know about it, so they will do what they are doing and, at some point, will be told, “You can’t have this for X reason.” It is a lot of money—so much that I do not think the rule will affect many small businesses in this scheme.

Q 29

Mel Stride: Do you suspect that it may be a sort of tick-box form that states that such businesses do not need that particular scenario?

Priyen Patel:  Yes.

Q 30

Richard Harrington: I am sure that hon. Members on both sides of this table would agree that both of your organisations help business a lot, and they also help us, in Parliament and in our constituencies, to understand small businesses. I refer to those of us who have not spent most of our career in business—I have, by the way.
Would I be fair in summarising both of your positions on the national insurance holiday as thinking that it is a good thing, which would provide a boost in certain regions, but that for someone wanting to set up a small business, it would be just one of a number of factors? Those include rent, business rates—a huge burden on anyone considering opening a shop or any other form of business—national insurance, income tax, corporation tax and a whole series of taxes and obstacles to business. Is it your view that the national insurance holiday would be only a small part of the total decision—not a fundamental consideration—for somebody looking to set up a business? So in an area that does not have it—which would include my constituency, because it is in the eastern region—it will not have the effect of making people decide not to set up a business.

Steve Hughes:  Principally, the policy is about employment, not necessarily start-up. If you are going to start a business, I do not think that it will come into the equation. If you are thinking about taking on your first member of staff, however, then it will come into play. As you rightly say, it will be within the context of other matters such as employment regulation, the tax system and so on.

Q 31

Richard Harrington: Obviously, I hope that, in the future, significant reductions in other taxes and bureaucracy will be a major boost to small businesses.
The hon. Member for Luton South asked you several questions, and you mentioned the modelling that you have done of the number of jobs—I think it was 57,000 or 53,000—that would have been lost under the employer tax regime as proposed by the previous Government. I understand how you can model that from existing businesses, but the hon. Gentleman went on to ask you whether you could model the number of jobs that would be lost in regions that did not have the new national insurance holiday—the east and London, for example. I cannot see how that would work, because it is trying to predict who would not set up new businesses. You kindly offered to send him the figures, but I do not understand how you could do that—[Interruption.]

Jim Sheridan: Order. Mobile phones are interfering with the sound. They may be on silent, but please take them away from the microphone.

Priyen Patel:  The research that we did before the election was on the 1% rise in national insurance contributions: it was not on this policy. We found that 57,000 jobs would be lost in the SME sector from the 1% rise. We have not done any modelling on this issue, but we have done work that shows that it would have an impact on the behaviour of businesses in those regions that do not have it—where they start up and what their employment intentions are.
In answer to your first question, we do think that it is a good thing, but hopefully as part of a package of policies that reduces regulation and tax burdens and looks at other key areas such as infrastructure, broadband and business rates. All those things have an impact on what a business does and where. The most important thing is where the demand is, and where the marketplace for that business is. The business will want to be as close to that demand and marketplace as possible.

Q 32

Andrew Bingham: You said earlier that business would only employ on demand, and that you do not actually think this would make them employ somebody. Have you not had any feedback from members suggesting that if it was a marginal decision as to whether they would employ somebody or not, this would give them the little bit extra that would make them employ somebody—for instance, if a new business wanted to employ a new salesman or wanted to expand?

Priyen Patel:  It is what I call the trigger moment. What would trigger somebody to employ someone? This would do that, but only if there is a business return on that employment. You have mentioned a salesperson: a business may benefit from paying up to £5,000 less NICs on the cost of that employee, but will that employee bring something to the game? If it is a salesperson, will they make that £5,000 plus whatever the average sales return is for salespeople in that business? It is a trigger moment of sorts, but the main issue is demand. If the business sees a demand and wants to tap into it—and employ someone to do that or to help that business—the NICs holiday will help them.

Q 33

Andrew Bingham: Yes, that is exactly what I mean—a trigger. We are talking about getting the message out, which a few of us are concerned about. I am not sure how closely your organisations work with smaller accountants. Business start-ups do not go to the big boys—the PKFs of this world—but to Mr Bloggs accountants in the high street, and they are the key people to get this message across. As someone said earlier, the first person every new business probably needs, apart from a sympathetic bank manager, is an accountant. Do you work closely with accountants in your organisations to make them the message carriers?

Steve Hughes:  From the chambers of commerce point of view, we have accountants within our membership. We have close links to the accountancy bodies as well.
I would like to make a further point on this. I talked earlier about the communication and stakeholder engagement through Departments and people dedicated to that. I do not understand how it can be so difficult for them to get this message out. From my point of view, you just take a blanket approach. There are lines of communication and you can go through trade bodies and through Government bodies. All you have to do is have somebody sorting it out, but somehow that gets lost along the way in certain policy implementation.

Q 34

Andrew Bingham: I take your point, but a micro-business—as they are called now—may not have time to read the trade press and so on. The two people they always see are the bank manager and the accountant, who is often part of a small business himself.

Steve Hughes:  Fair point. What I am talking about is getting that message to the accountants and through the banks as they are the people those small businesses interact with first.

Q 35

Heidi Alexander: I have a brief question relating to survival rates of small businesses. My constituency in south-east London has a higher than average number of firms going out of business within the first year or the first two to three years. What information do you have about regional variations in survival rates and how do you assess the exclusion of London, the south-east and the east from the proposals? Do you see connections between this national insurance holiday and survival rates?

Steve Hughes:  I would not say that there was initially too much of a relationship between the two. Ultimately, if a business sets up in an excluded area and does not survive its first two years, the maximum that it could claim over the first year would be £50,000. Would that £50,000 really put it out of business? I do not think so.

Priyen Patel:  I agree. I do not see a relationship between the two. I would echo what Steve says.

Steve Hughes:  In addition, if a business is failing, why would it take on 10 people anyway?

Q 36

Heidi Alexander: I would not have thought that those businesses would necessarily be employing 10 people in their first couple of years. But I know how close to the breadline very small businesses in parts of London can be when they are setting up. I also recognised what the chairman of the Federation of Small Businesses said previously about many businesses in the south-east working below capacity—which was what was driving my question—and the calculations that businesses make about whether they can continue. I just wondered whether the national insurance holiday would have some effect.

Priyen Patel:  John was talking about businesses running under capacity, and we have noticed nationwide that businesses have been running under capacity for the last three, maybe four quarters or so. But that is existing businesses. To use the same statistics for new businesses is probably quite dangerous. I keep going back to the point that a business will know it is in danger if demand just is not there. That is the most important thing.

Q 37

Heidi Alexander: But surely new businesses become existing businesses at some point?

Priyen Patel:  Yes, but the work that we have done on businesses running under capacity was primarily on existing businesses, not on just new and very young businesses, which I assume would have different statistical results. I cannot say that they would be different, but I cannot guarantee that they would be the same.

Q 38

Kelvin Hopkins: You have heard from my colleague, my hon. Friend the Member for Luton South, about Luton being a special case. It is an area that has significant economic difficulties in a region that is relatively prosperous, so the boundary problem affects us.
I am more concerned about the point that you made earlier about demand and that what really matters, above all, is the level of demand for the services from small businesses. They depend on individual consumers, other larger companies and, indeed, the public sector for their demand. They are all going to be cut and, as of yesterday, I understand, bankruptcies are up and consumption is down, and you will be much more savagely affected by that than can be compensated for by marginal changes in the tax regime. Is that a fair assessment?

Priyen Patel:  The reduction in demand energies of the public sector will obviously have an impact on businesses. There is no doubt about that. Where this policy could come in is in helping a business that already has an employment structure or plan to take somebody on and maybe cushion a loss in demand for a short period of time. That is quite a dangerous business plan to lead on, because you are taking somebody on who may not be as productive, in terms of achieving demand levels, as other employees would have been in the past.
It is important that, where demand or invoices from all sorts of places reduce, businesses look at where else they may go, what else can they do and at diversification. That is the key thing for most of our members, which are small and predominantly micro businesses. A lot of our members don’t have regular contracts with big Government Departments or big local public agencies—a lot of it is business to business—but a proportion will be dealing in one-off contracts with the local primary care trust, the local authority, fire brigade or whomever.

Q 39

Kelvin Hopkins: Would it help if whatever scheme is put in place was better targeted? Rather than on a simple regional basis, it could be targeted, perhaps, on a local authority basis, so that somewhere like Luton could be more fairly treated, and a more prosperous area of the south-east—the Surrey heartlands or whatever—would not get the same cash benefit.

Steve Hughes:  Where do you draw the line, though? As I said before, we can all point to areas within these regions that suffer from higher rates of unemployment and that are more reliant on the public sector than those areas that are included within the scheme. Ultimately, all you do by trying to drill down into those areas in the exempted regions is increase the complexity of the scheme. I know it is not necessarily ideal, but the straightforward nature of the scheme in the regions where it exists far outweighs the complexity of implementing it at a very targeted sub-regional level.

Q 40

Kelvin Hopkins: In the 1970s, and possibly before, Labour Governments had much more substantial and generously funded regional policies than have existed ever since. Is it not in your interests to lobby Government to introduce much more regional assistance of the kind that was produced by former Labour Governments, which would help business and moderate unemployment, particularly in those areas of highest unemployment?

Steve Hughes:  As I said earlier, the approach to lobbying or representation for organisations such as ourselves has fundamentally changed in the past two years. It used to be the case that you could go into a Government Department and request what you wanted without any kind of comeback on how you costed or implemented it. Now, it has got down to the nitty-gritty of where you would find the money and the practical policy implementation. Fundamentally, if you don’t have an answer to that, you may lose credibility as an organisation. Resourced as it is, as business or as representatives, you have to concentrate on those areas where you can have the most impact, which, for us, is infrastructure spending, the tax system, etc.

Jim Sheridan: If colleagues have no further questions, it just leaves me to thank our witnesses for coming along. I’m sure your evidence will be very much appreciated in the forthcoming sessions. Have a safe journey home.

Jim Sheridan: I invite our next witness, the representative from Wenta, to take a seat. For the record, will you introduce yourself to the Committee?

Chris Pichon:  I am Chris Pichon, and I am the chief executive of Wenta, which is the enterprise agency acting across Hertfordshire and Bedfordshire.

Q 41

David Hanson: Thank you, Mr Pichon, for your memorandum and for coming to the Committee today. I want to focus on the issue of the national insurance holiday, which is my main concern. In your memorandum you said:
“this is a divisive and almost unworkable scheme that will be expensive to introduce and to monitor.”
Would you like to expand on that for us?

Chris Pichon:  I wrote the paper on Monday, so I have not had masses of time to go through all the detail. The paper is very much my understanding of the proposals and how they are viewed by my organisation and generally in the area that I represent.
My general view is that, if you are going to apply a scheme such as this, it should be fairly applied across the country. When you start to draw lines and say that the scheme applies only to certain areas—I stand by the paper—it is divisive and it is unfair for those areas that are unable to gain the benefit, if any benefit comes from the scheme. Just to draw a line and say that it is not going to be applied across London, the south-east or the east is unfair. Kelvin said just now that areas in Luton definitely needed help, and there are always pockets that need such assistance. So when you just draw a line arbitrarily and say that a scheme will apply to only one area of the country, I cannot see any fairness in that.

Q 42

David Hanson: There will be a range of discussions on a number of alternative models for the distribution of the scheme, as opposed to the current model before the Committee. There will be, for example, the model of a universal scheme across the whole United Kingdom. There will be the model of a scheme that applies to specific local authorities. There will be a model that applies across the country in areas of high public sector employment that might lose jobs. There is the model that applies across the country in areas of high unemployment. Amendments have been tabled that reflect that. Do you have a particular view on whether or how the Committee should approach any of those potential solutions, as opposed to the current model?

Chris Pichon:  In my view, if you want to make something work, you have to make it workable and you have to understand it. I have read through the documentation and listened to your explanation and your differentiation between what is a business and how the scheme would and would not apply, and I have to say that it is incredibly complicated, which is why I commented in my evidence that you are making a scheme that is very complicated to understand. For people who are running their businesses, who are bombarded with information and bureaucracy, this is, frankly, just another turn-off.

Q 43

David Hanson: If you were the Minister—I would not want to impose such burdens on you—would you simply extend the scheme to cover every region of the United Kingdom?

Chris Pichon: I have also commented on the figures or the estimates as to what it would cost, or what have you. Just reading them, I was bemused as to how you can estimate those costs. If you are going to run such a scheme, it should apply across the country; you either do it as a whole or not at all. I am not sure that it will do a great deal of good, in a sense, or achieve its objectives if it applies only to certain areas.

Q 44

Gavin Shuker: First, I congratulate you on being from Bedfordshire and Hertfordshire; it is a very nice part of the world, as I understand it. One reason why we want to speak to experts in their field is to get a picture of what it is like locally, where they are. Can you explain to the Committee what kind of variation there is between different areas of Bedfordshire and Hertfordshire, in terms of public sector employment, unemployment and that kind of thing?

Chris Pichon:  Yes. We have offices and operate across Hertfordshire, in diverse areas, from Watford to areas in Potters Bar. We cover areas that have very low unemployment, such as Chorleywood but, on the other hand, you can go to a place such as Borehamwood, which has very high unemployment. We work in Luton, and I agree with what Kelvin was saying—there are areas with real pockets of deprivation. We run the innovation centre in Hertfordshire. It is based in Stevenage, which has a very high level of deprivation in an area called Bedwell. We see areas of deprivation, and we have delivered programmes that try to target such areas—frankly, it is very difficult. For example, the SRB programme was very targeted, but it is difficult to achieve long-lasting results where you try and do it by postcode, or whatever. It does not work.

Q 45

Gavin Shuker: Will these proposals help new businesses to start up in the areas of deprivation that you have talked about?

Chris Pichon:  I think I have commented that I do not see a business starting just because there is a bit of a national insurance tax advantage. I have also commented that, in our experience, very few start-up businesses actually employ people. Most, or almost all of them, operate from home in the early months. You only get employment when they are actually getting into growth and to a point where they are trading up and employing somebody becomes an option. It certainly does not happen in the early months.

Q 46

Gavin Shuker: You have differentiated between certain local contexts within Bedfordshire and Hertfordshire. Would you say that that remains broadly true across the entire east of England, and that there is a lot of diversity?

Chris Pichon:  Absolutely. The eastern region is very diverse. Up in Norfolk, you have a vast area of only green space and yet, down in Essex, in Basildon and Southend, there are areas where it is the complete opposite. So, across the whole of the east, there are areas of high deprivation. Just to ignore them, saying, “You are not going to cover that area with a scheme such as this,” is unfair.

Q 47

Gavin Shuker: What kind of proposal do you believe would really help those areas? Is it a national insurance holiday?

Chris Pichon:  My honest opinion is that there should be a consistent and long-term programme, which is not changed by the whim of whatever every year, or every two years. One of my criticisms about Business Link, which was a good idea in its original concept, was that its objectives were changed so frequently that it did not always meet the criteria that it was set up to achieve. The problem is that we are overburdened in our area by “initivative-itis”. You get set up to run one programme, which runs for a short time and suddenly, before you know it, it has gone and there is something else to be set up. That sort of thing is disruptive, and unless there is a long-term programme of support, I cannot see it having a massive impact or effect.

Q 48

Gavin Shuker: Looking at the proposals we are considering in this Committee, do you believe they fulfil the criteria of a long-term and consistent approach to taxation for business, national insurance and so on?

Chris Pichon:  Not really.

Q 49

Matthew Hancock: I have a couple of brief questions. You said that you did not think any new businesses employed anybody. You say in your written evidence that that is in the first few months, but this proposal is for the first few years. Do you therefore reject the analysis that was just confirmed by the British Chambers of Commerce and the Federation of Small Businesses that 800,000 employees will be positively affected by the proposal?

Chris Pichon:  I can only go by our experience of operating across an area the size of Herts and Beds, where we have helped hundreds and hundreds of people to start up. Very few actually get into employment.

Q 50

Matthew Hancock: But you don’t dispute the number across the country?

Chris Pichon:  I am not in a position to dispute that. If that’s what they are giving you, then they’ve obviously got that. It’s not our business to get into that.

Q 51

Matthew Hancock: Okay. In your written submission you said that the best thing would be to abolish employers’ national insurance contributions completely.

Chris Pichon:  That’s a personal view. I have shared it with some of my colleagues at work. I have tried to explain very briefly and just given a picture. I understand it collects a lot of money, but there are downsides to that particular element of taxation. It could be used for other things. I have given a demonstration of where I think it could be applied.

Q 52

Matthew Hancock: National insurance raises £95.5 billion. How would you square that circle?

Chris Pichon:  How do you mean?

Q 53

Matthew Hancock: If you were to abolish it completely then you would have rather a large hole in the finances.

Chris Pichon:  There are other ways in which the Government can get income back such as income tax, corporation tax and other taxes and by encouraging and getting growth in the economy, which will bring benefit, and by reducing unemployment.

Q 54

Matthew Hancock: So we should treble corporation tax in order to abolish national insurance?

Chris Pichon:  I am not saying that you should treble it. I am saying that there are alternatives. When I first started running my business back in the ’80s, national insurance was not at the level it is today. To be honest with you, it is being used on a political basis to avoid publicity around income tax.

Q 55

Matthew Hancock: You have said that employers’ national insurance should be abolished, and here is a proposal to do so in a limited area. But then you describe that proposal as a turn-off. How do you square that circle?

Chris Pichon:  There are different elements of it. First, I believe there is an unfairness if you apply it only to certain areas and not across the country. But as an overall statement, I think employers’ national insurance is an unfair tax on employment. It actually has a detrimental effect within the economy. An organisation like ours, on our income and the moneys that we generate through our operation, paid back to the Government last year about £110,000 in employers’ national insurance. As a not-for-profit company, if we were not paying that we could do an awful lot of good with that money and a lot of other organisations could do the same. That is what I am saying in that statement.

Q 56

Richard Harrington: Chris, thank you very much for this paper. Unfortunately, some of us received it quite late. Having just read through it, I feel I should press you on what I fear is a major inconsistency in it. I am not arguing for or against it, but half your paper calls for the abolition of the employers’ contribution to national insurance. We referred to it during the election as a job tax, and I accept the basic premise of this. But the other half of your paper refers to organisations in Watford, which I am familiar with, and elsewhere that you sit on. The main complainants seem to be people who rely on public funds to operate, CVS being a good example. I feel there is an inconsistency there. That links with the holiday that the Government have announced, because many people in Government—in fact, many people on both sides of the House—would, in principle, be in favour of reducing taxes as much as possible to incentivise business.
The Government, as you know, were faced with the biggest debt in history, and all of the other problems. There is already a big tax burden on business, and it would seem to me that, although the holiday has imperfections—regional imperfections being one of them, which we are discussing today—fundamentally, in the short term, it was all that could be done, because of our burden of debt. Do you agree with that statement?

Chris Pichon:  I agree that the state of the country’s finances is dreadful. I wrote the paper to be thought-provoking, if you like. I was saying that there are other ways that you might want to think about in the longer term. It is not possible to do it now, but I did not write it with the intention of saying that it has to be done now. It is about getting people to think that there are other ways of creating taxation. You have different objectives, do you not? You have, as I said in my evidence, a problem between the minimum wage and social benefits, and you have difficulties with the levels of business taxation. I wrote it to be a little provocative and suggest that we should consider such things. There might be an inconsistency, but I accept that it is not a perfect document—I had very little time to write it.

Q 57

Richard Harrington: On the narrow example of the holiday, the established figure is that to extend it to the whole country would have cost an extra £650 million. That money would have come, if I can localise it, from those very organisations—such as CVS and the others —that you mentioned. That is the problem that the Government had.

Chris Pichon:  Okay, I am not going to sit here and argue about it.

Q 58

Kelvin Hopkins: First, I found your paper really interesting. It was one of the most interesting papers I have read for a long time. I agreed with much of it, and, as you say, it was thought-provoking. The point that you make is that shifting the burden of taxation from employment to profits and to incomes would help generate employment. Generating employment would reduce the level of benefits paid out and increase the level of tax paid in, which would help reduce the deficit and boost the economy in many ways. That is very helpful, and I must say that I do not find much with which to disagree. Is your basic argument that marginal tax incentives unfairly distributed across the country will not help very much?

Chris Pichon:  Yes.

Q 59

Kelvin Hopkins: You also make the point—this is a point that I made—that the voluntary sector is currently in a state of meltdown. That is not going to do much for the big society, is it?

Chris Pichon:  I made that comment because, over the past two or three months, everywhere I go I have heard about what the voluntary sector is feeling at the moment, which I virtually quoted verbatim. I have mentioned all the various local strategic partnerships with which we are involved and with which I am involved. I do not want to get political, because we are a non-political organisation, but I am relaying the view that the voluntary sector is going to struggle immensely from April next year, which is a pity.

Q 60

Kelvin Hopkins: The voluntary sector is akin to small business in many ways, because voluntary organisations operate like small businesses in many ways.

Chris Pichon:  The voluntary offers employment prospects. I am talking about it as an employment area rather than as a small business. It also makes contributions through employers’ national insurance.

Q 61

Kelvin Hopkins: Have you looked at what other countries do in terms of taxation? The successful ones, such as Scandinavia, probably do it very differently to us.

Chris Pichon:  I am sure that there are plenty of examples everywhere if we look hard enough. There is always somebody doing something well that we could learn from.

Q 62

Stella Creasy: I want to follow up on the discussion about the voluntary sector, because one of the things that we are also expecting in the next couple of years is for some new voluntary sector organisations to be organised—the talk of the big society is about exactly that. Could you talk us through your experience of what makes voluntary organisations develop, and whether you think any of these proposals will help or hinder that?

Chris Pichon:  That is not a question, is it? Let us start with what makes them work. I would think that it is out of need. They spring up because there is a need, and people form together—

Q 63

Stella Creasy: To be clear, I meant the practical aspects of actually setting up a voluntary sector organisation to work in a local community, in terms of having staff, managing budgets and things like that. Do you think that some of these proposals will help or hinder that?

Chris Pichon:  I am not sure that I am actually in a position to answer that. I think they will find it very difficult. We have operated with a social enterprise adviser, and we have been providing support and help to social enterprises as they start. It is difficult, because of the nature of what they are trying to do, to get them to understand the elements of business in terms of their survival and that they need to create surpluses. They cannot just survive on grants.

Q 64

Stella Creasy: Do you think that if this proposal for an NIC holiday were applied to new voluntary organisations and new charities, that would be beneficial?

Chris Pichon:  Well, it would be, assuming that they would employ enough people to get that benefit. They still have to exist and get started in the first place. I do not think that you start a social enterprise on the back of a tax benefit.

Q 65

Stella Creasy: What about a not-for-profit voluntary organisation?

Chris Pichon:  The same applies.

Q 66

Stella Creasy: You would not see any difference?

Chris Pichon:  Not a lot, no.

Q 67

Stella Creasy: You would not differentiate between the private sector and the voluntary sector in this capacity, in terms of whether it will have an impact on employment rate?

Chris Pichon:  I do not think that you can differentiate between them. If you have employment costs, you have employment costs, and are they different between a small business and a voluntary sector organisation? It may have more impact on how that voluntary organisation organises its funding, but I don’t think there is any difference.

Q 68

Stella Creasy: The other thing that your note says is that:
“There are many businesses that are on the brink of closure”.
What do you think we could be doing to support those businesses that are on the brink of closure? Are there things that we could do on national insurance that might help or hinder them?

Chris Pichon:  I just made that point as an additional point. We hear about the difficulties of access to finance through banks. We see that regularly. We have a number of business centres across Hertfordshire, and we have nearly 300 businesses operating between those centres, so we are in contact with small businesses all the time. There is no question but that access to finance for those businesses is very difficult at the bottom end.
I was with Barclays bank at a function the other evening, and even people employed there were saying that they recognise that, at the lower end, it can be more difficult to access finance than at a corporate level. From the businesses that we’ve seen in difficulty, I really do believe that funding is a major issue for them. If there were ways of raising money other than through taxing businesses on jobs, it would be a significant help to them.

Q 69

Stella Creasy: What are the sizes of the firms that you are talking about? On average, how many employees do they have?

Chris Pichon:  Well, the vast majority of businesses in the country, as you will know, employ fewer than 10 people. I think 96% of all businesses operating employ fewer than that number. It is a vast number.

Q 70

Stella Creasy: So they are the sorts of businesses that this new start-up holiday would apply to if they were new, but because they are existing, it will not. In terms of the jobs in your local area and the small businesses that you are working with, do you think that it is more likely that we would be able to generate jobs within those organisations or by saying, “Let’s start again”?

Chris Pichon:  I don’t know. Are you saying that this holiday is actually going to be a job creation scheme? Is that what you’re saying?

Q 71

Stella Creasy: No, I’m trying to understand from you. One of the ideas behind this proposal is that it will encourage businesses to take on employees in new start-ups. I am trying to understand the other areas where we might be losing employees.

Chris Pichon:  I listened to the last bit of the questioning of the two previous witnesses, and they were both saying that employment is not driven by that. I agree with that.

Q 72

Stella Creasy: I am trying to get your sense of this as well.

Chris Pichon:  I agree with what they were saying. I think employment is driven by business need rather than just by tax advantage, and I do not think the policy will make any difference. It will not come into their thinking: it would not come into my thinking that I should employ someone because I have that benefit. It is about asking whether the business needs them, and whether there is a need within the business. If there is a benefit to it, I would probably do it.

Q 73

Mel Stride: You mentioned that you felt that this policy was unfair, because it is treating different regions of the country differently. There is some element of consensus across the various parties here in Westminster that regional policy is important, and that parts of the country need a bit of extra help compared with others. Inherent in that approach of regional policy is the fact that by definition you will treat some parts of the country differently from others. Are you, therefore, against regional policy per se? Is that fundamentally what is driving your objection to this policy?

Chris Pichon:  In some ways, yes, I am, because I don’t think there is any fairness to it. I think that if you are going to run a scheme it should apply to everyone. I do not think that it is fair to select certain areas and omit others.

Q 74

Mel Stride: So you would be against any form of regional policy—this or any other. It would make no difference how it was framed: it would fundamentally be wrong.

Chris Pichon:  I have been involved with Wenta for nearly 16 years and I mix with colleagues from other parts of the country, particularly from the north and the north-east. We often banter that we have to be far more enterprising because we do not get anything. We have not benefited from objective 1 or objective 2 funding, or local enterprise growth initiative funding, or whatever has been given out. We have had to create the opportunities from our own resources. In some respects, by throwing money at it you disincentivise innovation and the like. If you are going to have a policy, I think it should apply to everyone, and our company believes that too.

Q 75

Mel Stride: One thing that has confused me is that on the one hand you seem to be arguing that this particular policy in the Bill is not going to make a huge difference to employers—in other words, it is not really conferring any particular benefit, as such—but you seem to be extremely keen to have it along with everybody else. Why would you want something that is not actually—

Chris Pichon:  If you are going to do it, and if you feel there is a need to do it—I have said that I have not had a massive amount of time to spend going through every detail of it, but I was asked to come down and make a comment, and that is what I am doing—introduce it for the long term. Otherwise, what real benefits do you expect to get out of it? Programmes that are not there for the long term will not have much impact anyway.

Q 76

Martin Vickers: My thoughts are similar to those of my colleague Mr Stride, and to some extent you have answered the point I was going to make. I am still slightly confused about your views on whether it should apply to the whole country or only to certain regions. It is interesting to note that you would gladly take anything that is on offer, even if you think it is of minimal value. You have mentioned LEGI and objective 1; over the years we have had enterprise zones, assisted area status and endless initiatives from Governments since pre-war days, all of which have distorted the market to some extent. Are you actually saying that you want a complete free market and you do not want any handouts at all?

Chris Pichon:  My belief is that there should be support for start-ups and I have thought that for a long time. It does not matter whether it is a start-up in Surrey or in Barrow-in-Furness, if it is a new business it may need some help, and, if it is there, it should be available for all. I have never thought it fair to be so selective about where such schemes apply. My view is that you should apply them across the piece or not at all.

Jim Sheridan: If there are no further questions, I thank our witness for coming along. If your objective was to be thought provoking, you have certainly achieved it. So thank you for bashing through the weather to come here and have a safe journey home.

Q 77

Jim Sheridan: I now invite representatives from the Treasury and HMRC to take their seats. Thank you for coming along and being so patient. Again, just for the record, could you introduce yourselves?

Mr Gauke:  David Gauke, Exchequer Secretary to the Treasury.

Sam Mitha:  Sam Mitha, assistant director, HMRC.

David Owen:  David Owen, head of national insurance policy at the Treasury.

Q 78

Christopher Leslie: Good afternoon, gentlemen. Thank you for coming to the Committee. Mr Owen, am I right in my understanding that, for the annual changes to national insurance—the indexation for employers— the indexation amounts are typically publicised and announced, roughly speaking, in the autumn period?

David Owen:  Yes, that is right.

Q 79

Christopher Leslie: Have we had that announcement in the autumn forecast issued by the Chancellor last Monday?

David Owen:  The confirmation of the indexation has not yet been announced.

Q 80

Christopher Leslie: Is there a plan for the date when it will be announced?

David Owen:  I would expect it to be very shortly.

Q 81

Christopher Leslie: Could the Minister confirm when shortly will be?

Mr Gauke:  We anticipate it to be any day in the next two or three parliamentary days, which is consistent with the usual timing.

Q 82

Christopher Leslie: Do I need to wait till we get into the Bill proper next Tuesday to know whether you are planning to pursue the normal practice of the Rooker-Wise amendment? I know that is more related to personal income tax indexation, but that was a retail prices index tradition. I think it was written into statute, was it not?

Mr Gauke:  I think that is right. I believe it was one of the Finance Acts in the late 1970s. The details will be revealed by next Tuesday. I anticipate that you will have all that information, which will answer your questions.

Q 83

Christopher Leslie: Mr Owen—actually I do not know whether this question is to you or Mr Mitha, but I ask it of the relevant person—the regulatory impact assessment of the Bill suggests that 240 extra staff will be taken on to implement the national insurance holiday. Is that figure correct?

Sam Mitha:  The figure is correct, but they are not additional staff. Staff are being redeployed from existing work to undertake work on the national insurance holiday.

Q 84

Christopher Leslie: From where will they be taken? What tasks?

Sam Mitha:  They belong to the national insurance and employers office, where they deal with national insurance and employers issues.

Q 85

Christopher Leslie: So 240 staff out of how many will deal with this?

Sam Mitha:  About 4,000.

Q 86

Christopher Leslie: So quite a chunk. Which specific elements of response to employers will be diminished in order to create that unit of 240?

Sam Mitha:  The office that they have been drawn from deals with a large number of things. When the national insurance holiday was created, we set up a dedicated team which drew staff from across the piece, but mainly staff experienced in dealing with employers’ national insurance contributions. Given the size of the office, it was simply a case of making sure that the people who are most suitable for the task were drawn for this activity and that other work was appropriately reprioritised.

Q 87

Christopher Leslie: But it would be impossible to take 240 people into this new task without adversely affecting some of the responsiveness to employers on other NI inquiries, would it not?

Sam Mitha:  Well, the normal response to reallocating staff is to make sure that we avoid any kind of adverse impact on dealing with customer relations.

Q 88

Christopher Leslie: So how will you measure whether there will be any adverse impacts?

Sam Mitha:  We keep indices of levels of customer satisfaction and customer response. With the launch of the holiday, it has not been necessary to redeploy all those staff to this work straight away.

Q 89

Christopher Leslie: So over the three years of this scheme you will be able to track employer satisfaction and that information will be published?

Sam Mitha:  Some of it will be published, although I do not know whether it will go down to the level of detail of measuring the impact of the redeployment of up to 240 staff.

Q 90

Christopher Leslie: But Mr Gauke, you are happy to publish that tracking information so that we can see the impact of the redeployment on employer NI satisfaction issues generally?

Mr Gauke:  Well, HMRC is being much more transparent on the information that it is producing across the board, and we will continue that. HMRC will continue to reveal more information as to the service it provides and service satisfaction. I can confirm that the thresholds were announced earlier today.

Q 91

Christopher Leslie: Were they uprated by the consumer price index or retail price index?

Mr Gauke:  They continued in the usual practice.

Q 92

Christopher Leslie: Which is, Mr Owen?

David Owen:  Ordinarily the retail price index is used when there has been no policy announcement that differs from that.

Q 93

Christopher Leslie: And the announcement is—

Mr Gauke:  In a written ministerial statement today.

Q 94

Christopher Leslie: Okay. Thank you.

Mr Gauke:  I knew I had cleared it, but I wanted to make sure that it had been announced.

Q 95

Christopher Leslie: In terms of the application process and the new unit that is being created, what will be your target for turning round a decision when a new business applies and for letting it know that it qualifies?

Sam Mitha:  At the moment we are able to turn them round almost immediately because, as you can imagine, businesses are still getting to hear about the holiday.

Q 96

Christopher Leslie: How many have you turned round so far?

Sam Mitha:  So far it is 1,100.

Q 97

Christopher Leslie: And your aim over the lifetime of this holiday is how many?

Sam Mitha:  The forecast number of likely applications is 400,000.

Q 98

Christopher Leslie: So you are not really on course to reach that 400,000 level?

Sam Mitha:  We always expected that we would get the applications when new businesses started preparing their tax returns or their accounts. Setting up a new business is obviously a very hectic activity and tax is not always foremost in people’s minds. This is almost certainly something on which they would be relying on help and support from their tax advisers.

Q 99

Christopher Leslie: Would it be out of order to set yourself a three-month target for guaranteeing a turnaround of an application to a decision?

Sam Mitha:  In terms of responding to applications, I would be disappointed if we were not able to turn them around far more quickly than three months. As I say, at the moment we are turning them around almost immediately on receipt because we have not had a very large number of them so far.

Q 100

Christopher Leslie: What are your plans for advertising and disseminating information on this scheme?

Sam Mitha:  We have been doing quite a lot of work on communicating and marketing the new scheme. Obviously our preliminary focus has been on making sure we have the legislation ready. But now that we have the legislation and the guidance ready this is the range of the kind of things that we have done: we have a new employers’ helpline and anybody phoning that gets to hear a recorded message telling them about the NICs holiday from the time that it was announced. All new employers receive fliers together with the material they need to set up a pay-as-you-earn scheme telling them about the holiday. We have been in discussion with employer representatives to ensure that they pass this information through their trade bodies and other groups to people who might be in contact with new employers. Other more specific activities have included the fact that some HMRC offices run seminars for new businesses to tell them about what their responsibilities are going to be. Since September, those seminars have included details of the holiday. Occasionally, Companies House runs events for newly incorporated companies and again, since September, we have made sure that the holiday has been mentioned to such companies.
We communicate with employers through a bulletin, which is sent out regularly by HMRC and has included material on the NICs holiday. One of the key groups of people with whom we would want to work with any new tax initiative or with any new NICs initiative is agents, and a very large proportion of new businesses are professionally represented. So, in our regular newsletters to agents—and one in particular called Working Together—there is material on the NICs holiday. We have seen that the leading tax advisers and NICs advisers tend to publish articles on new initiatives; the latest issue of Taxation includes an article by Peter Arrowsmith, a leading authority on national insurance, in which he describes the holiday and draws attention to it for professional advisers.
We have been in touch with the British Bankers Association, and we have had contact with the Department for Business, Innovation and Skills, which has special responsibility for small businesses. Following one of the expert witnesses, we will also follow up the reference to the BIS mentoring scheme to ensure that we highlight the holiday for people who might have an interest in it.

Q 101

Christopher Leslie: I know that some of the team at the Institute of Chartered Accountants in England and Wales have recently written about another national insurance holiday or similar schemes in the past in quite sceptical terms, particularly when thinking about the fact that a lot of hurdles have to be jumped. Are there echoes of such a scheme? Are you confident that your 400,000 will be reached? Are you confident, for instance, that by the end of this calendar year, you will have reached a certain proportion? What will that figure be, and what lessons do you think can be learnt from the scheme that ran in the past?

Sam Mitha:  Obviously, when the new Government came in and said that they wanted to introduce the NICs holiday, we looked very closely at the past experience of running a holiday. The present NICs holiday is quite different from the original scheme, which was confined to people who had been unemployed. It included a number of features which are obviously not replicated in the present arrangements, because they had had an impact on people’s individual national insurance liabilities. This scheme was designed with a view to being operational very quickly, because as you know, it was announced in the emergency Budget. We were able to have guidance on the new scheme ready by 6 September, so that new employers were able to take advantage of the scheme almost immediately.
The new scheme does not require employers to do much more than make a number of very simple decisions, for example: is it really a new business? Is it located outside one of the excluded regions? And, has it actually taken on an employee after the 22 June? So, in terms of simplicity, the new scheme is a completely different kettle of fish from the scheme that was operated in the mid-1980s, which, as I have said, had an unhappy record.
On levels of take-up, the scheme will effectively last for three years. Although we can bring the scheme to the attention of new employers, there is very little we can do, because it is a scheme that people have to apply for. We cannot actually force them to apply for it. We know from experience that new businesses have a pretty hard time keeping their head above water, without having to worry about whether they are claiming everything that they might be entitled to. We are fairly sure, however, that the employer NICs holiday will be something that professional advisers will be bringing to the attention of their clients, because it is definitely something that will relieve them of additional liability. It is also something that we are hopeful will influence them when it comes to making decisions about whether, and, if so, when, they take on employees, because they will know for a fact that the level of employer NICs that will be payable when taking on a new employee will be mitigated if they are in one of the targeted regions.

Q 102

Matthew Hancock: Earlier, we heard from two of the country’s leading business organisations—the British Chambers of Commerce and the Federation of Small Businesses. One said, “I have no doubt some start-ups will be incentivised to take on new people.” The other said that, in some of their work, “60% of small and new companies had said that a cut in employer taxation would trigger them to take on more people.” Mr Gauke, could you explain what impact you think that the national insurance holiday will have on generating new jobs?

Mr Gauke:  Well, the estimate that we have made is that there will be, as we have heard, something like 400,000 businesses that will make use of the holiday. Our estimate is that that will average out at two employees per employer.

Q 103

Matthew Hancock: Is that two extra employees per employer?

Mr Gauke:  No, that is two who will make use of it. The analysis of the behavioural impact, the value-added that is at the heart of your question, is quite difficult to make an assessment of at this point. That is the two per employer that we estimate at the moment. On behavioural impact, we will see. A common-sense approach would suggest that it will have an impact, but, of course, what we are looking at here is bringing through a dynamic impact of a tax cut. There is always a degree of uncertainty about that, so we have been relatively cautious. We are not making bold or unsubstantiated claims as to what the behavioural impact will be, but we will be keen to study this and see what the impact is. Common sense would suggest that it must be helpful for a new business, at a time when, perhaps, it will be vulnerable, to have greater confidence to take on staff when they are not having to pay employer’s national insurance contributions as well, which is a cost on labour and one that is likely to deter them taking on employees.

Q 104

Matthew Hancock: The flip side of more jobs being created through tax breaks, of course, is that if you put taxes on employers up, they might take on fewer people. The FSB mentioned their estimate that the so-called jobs tax would have cost 57,000 jobs, and the Bill is part of the process of trying to reverse that. Do you agree with that assessment? If not, do you have a separate Treasury assessment?

Mr Gauke:  Unfortunately, I am not privy to the advice that was given to my predecessors as to what they anticipated that cost in jobs would be. I have no reason to doubt that estimate of 57,000 jobs that would be the cost if we did not take some steps to reverse the increase. Clearly, as you make the cost of labour more expensive, fewer jobs will be created, and that is perfectly sensible. The intention behind the second part of the Bill and the intention behind the increase in the threshold in employer’s national insurance contributions is to reduce the cost of labour compared with the situation that we inherited.

Q 105

Matthew Hancock: Finally, we have heard a lot this afternoon about the fact that there is a regional breakdown in the coverage of the NICs holiday, and there were questions about whether it would be better to be more targeted. The employers’ organisation said that that would make it more complex. Have you made any assessment of how far people travel in order to work? For instance, I know that lots of people from my constituency travel to Cambridge, which is in a different county. Have you made an assessment of how much the ability to work somewhere different from where you live ameliorates the impact on pockets of high public sector employment?

Mr Gauke:  I think that is an important point, because the fact is that labour markets tend to be larger than, for example, just a local authority area. Depending on where you are, they can be larger than a county. Were we to try to target this on pockets—I understand that there will always be an argument over that, but we have to balance simplicity with targeting and we have settled on a regional approach—particularly if you look at London, the south-east of England and the east of England, you often find that pockets of relative poverty tend to be next to areas of relative affluence. Those areas will certainly be within the range in which people would travel to work. We have to bear in mind that trying to target something on a particular local authority will mean that some of the beneficiaries could well be people living in the suburban area next to it, which is actually quite prosperous. I think we are getting the balance right in that context.

Q 106

David Hanson: Could I just ask, as my first question, what is the net cost to the Exchequer over the period of the scheme?

Mr Gauke:  Over the three years the net cost is £940 million.

Q 107

David Hanson: Have you set a cap on that net cost? If, for example, 500,000 businesses took up the scheme would the Exchequer put a £940 million cap on the top of the scheme?

Mr Gauke:  The £940 million is an estimate on the basis of the assumptions that we talked about earlier about the number of businesses and the number of employees. That is our best estimate as to what the cost would be. It is not a cap, as such; if we were seeing different numbers then the cost may vary.

Q 108

David Hanson: If, let’s say, two years downstream the scheme appeared on current estimates to be costing £1.3 billion as opposed to £940 million, would it continue into its third year or would it be capped at £940 million?

Mr Gauke:  We would continue with the scheme as it is. Of course, were we to see greater take-up—returning to one of the earlier questions—it is likely that we would be seeing some evidence of a significant behavioural impact, if we were seeing a lot of start-up businesses in the relevant regions. That would have some positive effects. As with most policies, we are not putting in a particular cap. That is our estimate as to what the cost will be.

Q 109

David Hanson: Other schemes that have been designed to help stimulate the economy, such as the car scrappage scheme, have taken place over a defined period of time, using a defined resource and within a defined market, whatever that market might be. I am interested in what the logic is behind having effectively an open-ended scheme—based on the estimates, I accept—that could cost more or less than the £940 million. What is the logic behind that assessment?

Mr Gauke:  I think it is very important in these circumstances to provide businesses with the certainty that the scheme is there, that it will be a certain way and that if they act in a particular way the scheme will be available for them. If we were to say, “It’s £940 million, and once that last pound has been spent, sorry, old boy; you have set up your business but you’re not getting any more money,” I think that would undermine the whole purpose of the scheme.

Q 110

David Hanson: But the point I’m making is that in your answers to my written questions you have estimated that the cost of including London, the south-east and the eastern region in the scheme would be an extra £660 million. In theory it would be possible, therefore, to have a scheme that cost around £1 billion, which was available to the whole of the United Kingdom but which was operated over a shorter period of time. There is no bar to that, is there?

Mr Gauke:  Well, our view is that the £940 million is in the scorecard; that is based on the analysis that has been done by HMRC and the Treasury. If we were to shorten the time period, we would come back to some of the earlier evidence that sometimes it takes businesses a little while before they start taking on employees. It may take a little while for awareness of the scheme to spread and to start to influence behaviour and encourage start-ups. We have to make a judgment on that, but we think that three years is about the right length of time for the running of the scheme.

Q 111

David Hanson: What it the logic for excluding London, the south-east and the east?

Mr Gauke:  I have already talked about why I think trying to do smaller pockets might be ineffective, but the fact is that those regions already have strong private sectors and are less reliant, by and large, on the public sector as a whole. The creation of start-up businesses tends to be faster in those regions and conversely slower in other regions. As we accept the principle of regional policy, and we also accept that resources are constrained, we have taken the view that we should target the scheme at those regions excluding the three that I have already mentioned.

Q 112

David Hanson: If I said to you that 23 of the top 100 constituencies for public sector employment are in London, the south-east and the eastern regions, or if I said that, at 9% in November 2010, London has the highest unemployment of any region in the United Kingdom, is there a logic to excluding those regions? Part of the logic for this measure is that public sector employment is potentially one of the areas of loss; another part of the logic was unemployment. We could go through the deprivation index or a number of other measures that suggest that there are very severe pockets of unemployment or deprivation in which people do not necessarily have the ability to travel to other areas, or, indeed, are within the criteria that you have set for other regions being included.

Mr Gauke:  It is very important that we try to tackle deprivation and poverty wherever they are. There is a question of whether the NIC holiday is a particularly useful method for dealing with pockets of deprivation in, for example, London. I fully accept your point on unemployment in London, but London is also one of the places of enormous job creation. Many people living in the south-east of England and the east of England work in London. If we were to include London within the scheme, it might help start-up businesses as a whole, but I am not sure that that is the most effective way to deal with such pockets of deprivation in London. I think that there may be other ways of doing that, whether that be through the regional growth fund or welfare reform, which are more likely to be effective in tackling deprivation in London.

Q 113

David Hanson: Did you cost or develop any alternative scheme, either at official level or at ministerial level, before settling on the scheme that excludes London, the south-east and the eastern regions? Did you look at other options and models?

Mr Gauke:  We looked at doing this nationally. We did not proceed with that because the cost would have been greater. We considered the option of looking at this, as you are suggesting, at a much more localised level, but that ends up being more difficult to administer and it is more likely to be distorted—one side of a road might get it, but the other side of the road might not. That is always an issue if you have a boundary, but it becomes easier if you do it on a regional basis. As I said in my answer to Mr Hancock’s question, people travel beyond their local authority in order to work. We felt that the balance was better if we did it on a regional basis.
I also want to make the point about basing this on local authority regions. I listened with interest to the evidence from Wenta. If I might return us to Hertfordshire for a moment, Three Rivers district council, which borders Watford, is one of the local authorities in my constituency, and within that largely prosperous local authority is one area, South Oxhey, that is quite deprived. If you were to try to do it on a local authority basis, I think people could also say that it was a deprived ward. If you start looking at this on a ward basis, you start to get more and more complicated, more and more distorted and you have a less effective system. I think you would hear more complaints about boundary disputes and so on.

Q 114

David Hanson: I have just one final question. We will return to all of these issues in detail over the next week. In the event of the take-up not progressing at the rate you have anticipated, would you consider expanding the scheme to London, the south-east and the eastern region?

Mr Gauke:  We are putting this into primary legislation. If we found after a long period—not just in the first few months—that the take-up was not as high as we anticipated, one could make the point that the policy was not being as effective as we had hoped, although the costs would be lower, as you have suggested. That would be an argument against extending it. Because there are particular problems and issues that we want to overcome in areas where the public sector takes a bigger part of the economy, I do not think we would look to return to this. If, however, we found that this had a substantial, dynamic effect on our economy, we would need to look at this again because it would suggest that it was a very effective method, but I do not want to make any promises to the Committee that we would extend it.

Q 115

David Hanson: A final, final question from me then on existing businesses. This is obviously for new businesses. Did you in preparing this scheme undertake any costings or did officials make any proposals for consideration by Ministers in relation to existing businesses of a certain scale, in terms of numbers of employees, turnover and time in business?

Mr Gauke:  The focus has always been principally on start-up businesses. The reason for that is that we would run into what the economists would call a dead-weight cost.

Q 116

David Hanson: The focus was on it but did you ask for any coverage?

Mr Gauke:  We did and consideration was given to whether it could be extended beyond that. We were always conscious that this scheme would become very expensive if we applied it to existing businesses. The intention is to encourage start-ups.

Q 117

David Hanson: It would only be expensive, Minister, if you had an open-ended commitment. If you fixed a budget for it, you could apply this scheme in any number of ways.

Mr Gauke:  The best thing to help start-up businesses is our policy to raise the employers’ threshold. I am pleased that we have been able to do that. It would have been damaging for start-up and existing businesses had we allowed the previous plans for a substantial increase in employers’ national insurance contributions to be left unameliorated.

Q 118

Gavin Shuker: I just want to talk practically about the application process and what happens when the form or the online submission comes to HMRC. What checks are run on those applications?

Sam Mitha:  The application process is relatively simple and straightforward. We have a system whereby new businesses that want to take advantage of the holiday are invited to send in an online application form unless they are in receipt of state aid, in which case they need to fill in a manual application form. The application form simply requires them to provide some basic information such as their reference numbers, the name of the business, the date the business started, the business address, the postcode and the region or country in which the business is located, and to certify that they have read the guidance on Business Link.
The significance of asking for this information is that it enables us to tell very quickly whether the business qualifies. So, for example, if the business started before 22 June—the date of the emergency Budget—we could immediately notify them that they are not eligible. The intention is then to operate what we call a “process now, check later” system. We notify them as quickly as possible that they are eligible for the holiday, and that they can legitimately start withholding payment of NICs if they are eligible. More fundamentally, it gives them an incentive straight away in terms of their disbursements. One of the things that we took into account in the design of the scheme was that the lifeline for small businesses is cash flow.

Q 119

Gavin Shuker: We all definitely welcome the fact that it is a quick and easy process at your end. The key thing when it comes to part 2 of the Bill is that you check the business address and the postcode. Does that mean that you have a postcode file of those which are eligible and those which are not?

Sam Mitha:  The design of the scheme, as the Minister was explaining, is relatively straightforward, in that all you need to demonstrate is that you are not located in a so-called “excluded region”. Those regions, and the details of which regions qualify, is set out on Business Link. Anyone who is interested in applying for the holiday would be able to tell very easily whether they qualify, either by entering their postcode into the database, or knowing which region they belong to. Those regions are large areas of the country, whether they are qualified or not.

Q 120

Gavin Shuker: So you have a list of excluded postcodes, which at that point would filter a business out of the pool.

Sam Mitha:  Yes, it would be very easy for us to tell if someone was in a region that did not qualify.

Q 121

Gavin Shuker: It strikes me that it would be possible to change those postcodes right the way down to the individual 15 households of a postcode, which would make a business eligible or ineligible. Is that correct?

Sam Mitha:  At the moment, all we are discussing is the application process and the compliance checks that take place under HMRC’s process of compliance, which is process now, check later. Those checks would be made a significant period of time afterwards. If you have a system that required us to operate a more complicated, or a narrower, range of areas, by reference to which we were giving relief, that would raise the costs of compliance substantially. What you would end up having is—to use the Minister’s expression—a dead-weight cost. Instead of making the maximum amount of money available to new businesses, a significant amount of money would be absorbed in trying to administer the scheme.

Q 122

Gavin Shuker: So you are saying that the costs of the scheme would vastly increase if you had to work out all the different postcodes.

Sam Mitha:  It would increase the costs if we had to operate the scheme on anything other than the simple basis we have it on currently. People can quickly tell whether they are eligible and it is easy for us to check whether they are qualified when we do compliance. The initial compliance checks primarily reference when they started trading. The subsequent checks are done because it takes some time for us to receive information about the profitability of the business.

Q 123

Gavin Shuker: I suppose what I find confusing about that is that I can understand how the costs of the scheme could increase in other areas, such as publicity about which areas are affected and in working out which areas should be included, but I am surprised that the practical aspect of a form coming in and you performing a postcode check would be significantly more expensive.

Sam Mitha:  The postcode check is part of the process of compliance checks that we undertake some time after the application. The Minister was keen that whatever relief was available was notified to people straight away. The whole application process was designed to ensure that we got the information that we needed immediately to check whether someone qualified. The key aspect is whether it is a new business. You ask whether it is a new business and when it was set up. We will use all the other information in the form if it becomes necessary. We do not always check every application that we receive. We run a risk-based system, and the kind of information that is contained in the application form, and any other information that we get, is among the criteria that are taken into account in deciding whether we undertake any inquiries on a particular case.

Q 124

Gavin Shuker: Finally, if I may ask the Minister a question. It has been said that if the scheme were to work on a smaller basis than by region, it would be too complicated. In your evidence, you described it as more difficult to administer. Can you give us a summary—a couple of paragraphs—as to why it would be too complicated, or too difficult, to administer on the level of constituency or local authority?

Mr Gauke:  It comes back to the points that we have heard about checking, and ensuring that the address is in the precise areas. It is also about the possibly distortive behaviour of a business moving from one place to another to benefit, something that would not do anything much for the relevant area. The more detailed running down the address becomes, the more complicated it will be to administer.

Q 125

Gavin Shuker: Obviously, you are a Member of Parliament in Hertfordshire, which would be exempted from the scheme. Have you had contact with any local businesses or people who are thinking about starting up businesses—either praising or condemning the scheme?

Mr Gauke:  No.

Q 126

Mel Stride: Just looking at the national insurance holiday and the issue of tax avoidance and evasion, what sort of scope is there for that to occur in terms of companies starting up, then shutting down and rebranding, and so on? What kind of measures might be taken to ensure that that did not happen? What effect would any complexity in those areas have on costs to HMRC and to the applicants?

Sam Mitha:  One of the things that we were very clear about when we started to help the Minister to design the scheme was the risk of avoidance. We needed to trade off the fact that we wanted the scheme to operate flexibly and quickly for small businesses that cannot, in the main, normally afford very expensive accountants, against the risk that some bigger players might find an opportunity to exploit the arrangements. The Minister took a decision to cap the number of employees who qualify and set the maximum limit on the amount of money per employee that would be eligible for relief. Given the fact that there is a limited amount of money—there is a maximum amount of relief that businesses can access—it reduces the incentive for people to engage in that kind of avoidance.
The other thing that the design of the scheme did was to make sure that people who had been in business six months prior to the launch of the scheme, or who claimed to have started a new business, were disqualified. So, you could not have a situation where an existing business decided, for example, that it would stop trading today and recommence trading tomorrow, purporting to be a new business. Similarly, we were very alert to the fact that it was possible for people to restructure matters so that an existing business could claim to be a new business.
The legislation includes very robust anti-avoidance provision, which says that if there are any arrangements in place that are designed effectively to fragment or restructure an existing business, they will not be eligible for the relief payment. We are fairly confident that the combination of the monetary limits on the maximum amount of relief that a business can claim, which limits the incentive, the rules on what is regarded as a new business—the bit I mentioned about the bulk of the business being carried on by somebody else—and the very robust anti-avoidance provisions in the legislation will reduce the incentive for attempting avoidance.

Q 127

Mel Stride: On the national insurance thresholds, there has, for some time, been a dislocation between the threshold levels kicking in for national insurance and for income tax. So, from the point of view of the employees, you have the anomaly that, over a range of increasing income, you actually get diminishing marginal tax rates. Is that an issue that you sought to address in any form in the changes? If so, what impact do you think the Bill will have on that?

Mr Gauke:  On the raising of thresholds, we have seen a very substantial increase in the personal allowance. In an attempt to try to counteract the increase in employees’ national insurance contributions, as a consequence of the negotiations which were part of the coalition agreement, the focus has been on raising the personal allowance and the threshold in this particular area. Clearly, in terms of simplicity, the fewer cliff edges and steps within the tax system, the better. There are always pressures to drive them apart, but the more that can be done the better.

Q 128

Heidi Alexander: I have questions in two different areas. First, the Minister has spoken a lot about pockets of deprivation, and I contend that there are significant swathes of London that are heavily reliant upon the public sector. The boroughs of Lambeth, Southwark, Lewisham and Croydon have 185,000 people employed in the public sector between them—and that is a larger public sector work force than in Tyne and Wear. You have talked about the distortive effect of businesses potentially moving areas if the scheme worked on a finer grain. For me, however, that would be a good thing in that part of London, and I wonder what you would say about that.

Mr Gauke:  The intention behind the policy is to create new start-ups that would not have been there before, as opposed to trying to get a start-up that would have been on one side of the river to open on the other side of the river. That is why having the fewest number of boundaries is better. That is one of the arguments for taking a regional approach.
I fully take on board the point about unemployment in London, and that there are large areas of London that are relatively deprived, but it is the nature of London that those areas are often next to relatively prosperous areas. The challenges of London are probably not best met by this particular policy. There are other things that can be done: some of it is to do with infrastructure; some of it is to do with welfare reform to ensure that work pays; and some of it may be to do with the regional growth fund. Given that London creates an awful lot of jobs—yes, it has a lot of unemployment, but it also creates a lot of jobs—the impact of this scheme, which is designed to create more jobs, would be relatively marginal in addressing the concerns that you understandably have as a constituency MP.

Q 129

Heidi Alexander: How do you view the inconsistency that London can, of course, apply for the regional growth fund, but new start-ups in London cannot benefit from the NICs holiday? That is recognition that there is a problem that needs to be tackled, and yet the Bill, if it moves into legislation, will not enable new businesses to benefit from that.

Mr Gauke:If there are areas of infrastructure that can be improved to help a part of London, the regional growth fund can work effectively. Lots of jobs are created in London, but they are often not going to your constituents, so the question is how we address that. It would be quite expensive to extend the NICs holiday to London and it might or might not result in more jobs being created, but it would not necessarily ensure that those new jobs were going to your constituents. What is happening at the moment is that there are quite a few jobs being created in London, but that is not necessarily resulting in low unemployment in Lewisham.

Q 130

Heidi Alexander: In your mind, are the regional exemptions about cost or complexity?

Mr Gauke:  The reason why we have not done this nationally is because we have a constrained budget. The first question was whether we did it nationally, which was what we originally considered—my party considered it in Opposition—and, in order to reduce its cost, we decided to focus it. The next question was whether we tried to do it on a regional basis or tried to break it down more locally. For the reasons that I have outlined, we took the view that doing it on a regional basis would be more effective, less distortive and less complicated. If we started doing it in London, one local authority might get it and another local authority would not get it, and you would have a lot of discussions about whether this bit of this local authority is more deprived than that bit of the other local authority. We are trying to find a balance, and our view is that we have got the balance right.

Q 131

Heidi Alexander: Mr Mitha, you said that you have had 1,100 applications so far and that there will be initial compliance checks. How many people have you rejected at the first obstacle? Have you had a number of applications from people who are not eligible?

Sam Mitha:  Unfortunately, I do not know exactly how many we have rejected, but my understanding is that most of the applications that we have received have been from people who regard themselves as eligible. That may not subsequently be the case if and when they are selected for compliance inquiries. My colleague has just passed me the information—we have rejected 54 of the 1,100-plus applications that we have received so far.

Q 132

Kelvin Hopkins: I think I had better ask the Minister this question, although I am sure that I would get interesting answers from the HMRC representatives. We have a tax gap between the tax that should be paid and the tax that is actually paid. Legitimate estimates put that figure at some £120 billion a year, which is a vast sum of money. A small dent in that would make this scheme easily affordable, it could cover the whole country and the administrative costs, and pay for much more besides. Could you not usefully target the tax gap?

Mr Gauke:  I will try not to be too diverse, but, first of all, I think that it is right that we try to tackle the tax gap. The number that HMRC has produced is not the £120 billion figure, which has some fairly fundamental flaws in its methodology, but the £42 billion figure, which the Government accept, as the previous Government did, as being as accurate as we can make it. Yes, we should try to reduce it. In the comprehensive spending review we announced £900 million to be spent over the spending review period on measures to tackle criminal behaviour, to tackle tax evasion and to reduce tax avoidance.
You are perfectly right. Although I disagree with the number, I think that it is right that we try to reduce the tax gap. There is always, inevitably, a tax gap, but we hope to be able to get it down. HMRC believes that the additional expenditure that we announced in the spending review will get the tax gap down by the region of £7 billion a year by the end of the spending review period. My role as Minister is to do what I can to assist HMRC in ensuring that it does that.

Q 133

Kelvin Hopkins: A proportion of the tax gap is not just avoidance, evasion or criminal activity: it is simply that HMRC does not have enough resource to collect the taxes. There is a fair chunk, even of the £42 billion, for which there is not enough resource to collect. I am told by tax officers, just as I was told many years ago by tax officers, that every additional tax inspector collects many times their own salary. Is there not a case for substantially increasing the number of tax officers, and recruiting and training them? They will all collect many times their own salary and solve a lot of those problems.

Mr Gauke:  With respect, I think that that simplifies the position a little. It could be pointed out that HMRC’s staff has been reduced over the past five years and, actually, compliance yield has gone up. It is not just a question of numbers, it is a question of ensuring that HMRC has the right technology and that staff are deployed in the right areas. It is right that we should find ways to make some of the processing within HMRC more efficient and free up resources to strengthen tax inspectors, who can play a vital role. We should ensure that the deterrent works, that we have proper campaigns and that HMRC is visible and effective in taking on those who, one way or another, are not paying the right amount of tax. I do not think we want to overstate this—to believe that we can solve all our problems in our public finances simply by employing more tax inspectors—but we need to do what we can.

Q 134

Kelvin Hopkins: I have written to the Treasury about this in the past, and it constantly comes back with the argument “Oh, well, we want to economise by reducing the head count of tax officers.” It is utterly irrational when cutting tax inspectors will result in less money being collected, rather than in money being saved. I found this with VAT inspectors at local level 12 years ago when I wrote to Gordon Brown about it and I received the same answer. More recently I have spoken to the senior representatives of the senior tax officers in HMRC—not just the Public and Commercial Services Union, which I am very close to as well—and they did not disagree with my analysis that many of the staff were overworked and underpaid; that there were not enough of them; and that with many more staff they would do a fantastic job and really close this tax gap very substantially. Not only would it solve this problem, but it would start to reduce the deficit, which I am sure would be helpful.

Mr Gauke:  Given your remarks, I am sure that you welcome the £900 million that we have announced that we will spend over the spending review period in strengthening the compliance capability of HMRC.

Kelvin Hopkins: I hope that compliance capability implies more tax inspectors too.

Q 135

Stephen Williams: I have a couple of questions on the policy imperatives behind clauses 4 and 5. Is the policy imperative to incentivise start-ups, or to incentivise start-ups taking on extra employees?

Mr Gauke:  We want a combination of the two. The answer is both; clearly it is as employees are taken on that the benefit emerges. The first two or three years can be very difficult for a new business, and it faces many challenges, but we want as far as possible to reduce some of the challenges of the additional costs of labour that result from national insurance contributions. It is a big challenge for a new business to take on that first employee; it is a major hurdle. We hear that a lot from the Federation of Small Businesses. If the policy can assist that, and can enable and encourage businesses to take on that first employee with greater confidence, we think that is a very worthwhile objective.

Q 136

Stephen Williams: Presumably, you are trying to get a double benefit for this incentive. Would you have looked at simply exempting existing businesses taking on an extra employee?

Mr Gauke:  Again, if we had done that the potential dead-weight cost, as the economists call it, might have been very considerable indeed. I think there are particular challenges for new businesses in the early stages, and at this particular stage in the economy when we hear projections about job losses in the public sector. Let us hope that we are coming to a period of the economy starting to grow, as the OBR projects. So now would seem to be a good time to try this policy.

Q 137

Stephen Williams: Just a question on who would be eligible. Clause 4(1)(a) implies that it would be a sole trader or a partnership, but clause 5(6)(a) mentions corporation tax. Would limited companies come within the scope of this provision as well?

Mr Gauke:  Yes; essentially it is an entity carrying on a trade or a profession.

Q 138

Stephen Williams: My final question is on clause 5(6) again. How joined up is this with other start-up incentive schemes? I used to advise businesses on the Enterprise Investment Scheme and the Enterprise Management Incentive when I was in practice, and I endorse what was said earlier; I am sure that accountancy firms up and down the country will be writing to their clients at the moment and organising breakfast seminars to get them through the door so that everyone benefits from the scheme. All the current income tax and CGT incentive schemes exempt other activities, particularly non-trading activities. Yet, under subsection (6), a property business or an investment business would qualify, which is a departure from existing incentive schemes. Why is that?

Sam Mitha:  The Minister was very keen to make sure that this was available to all small businesses. As he has said, a new business carrying on a trade profession or vocation, whether it is a sole trader, partnership or newly incorporated company, would qualify. Similarly, there are a number of provisions under the Taxes Act, some of which have been referred to, which make companies carrying on property or investment businesses ineligible for the benefit, but in this instance the Minister decided that, because the scheme was intended to promote activity, they should be included within the scope of the scheme. The effect is that it encourages new businesses of all sorts, including those that are exempted specifically from other specific incentives such as EIS.

Q 139

Stella Creasy: I have a question for each witness, but I am conscious that Mr Owen has not been asked something for a while so I shall start with him. I am looking at the back of his memorandum about national insurance and doing some of my own sums. Will you talk me through first the pre-behavioural and post-behavioural Exchequer impact? It appears to suggest that, for the £940 million, you are only going to get £40 million worth of jobs. That is quite a lot of dead weight in the scheme, is there not?

David Owen:  The £40 million behavioural effect is an estimate of the behaviours that would lead to people taking up the scheme who were not really intended to do so. There were then some indirect behavioural effects that are not included in the figures.

Q 140

Stella Creasy: But, with this measure, what you are looking at will cost the Exchequer only an extra £10 million in the first year. You have projected that. I have been doing some sums while I have been waiting, and I calculate that as about 2,000 extra jobs. If you were, as an alternative, to spread that £940 million over the three years—about £300 million over the course of one year—and put it into another scheme such as the future jobs fund and paid people £25,000 a year, you could get 12,500 jobs. Would that be a fair estimate in terms of the cost of the scheme?

David Owen:  I am not sure that that is the right interpretation of those particular figures.

Q 141

Stella Creasy: But the chart suggests that the scheme will cost the Exchequer only an extra £10 million in national insurance contributions that would have been made. That is what you are projecting. There is a question about how you are using the funding in each year.

David Owen:  Of the £940 million total over the whole period of the scheme, there is an allowance for £40 million —as you referred to—for direct behavioural effects. That should not be interpreted as saying that only that cost is generating new jobs. Does that answer your question?

Q 142

Stella Creasy: But in terms of our understanding the direct impact of the policy, that £40 million is the only direct impact that you can predict, is it not? You are hoping that other things will happen as a result.

David Owen:  We are expecting some dynamic effects because, after all, this policy reduces labour costs.

Q 143

Stella Creasy: But you cannot be sure.

David Owen:  We cannot be sure of the scale. Indeed, we are not entirely sure of the direct effects either.

Q 144

Stella Creasy: But we can be sure of the impact of other policies aimed at creating jobs, like the future jobs fund, and of what money spent on those would deliver in numbers of jobs. The calculation equates to about 2,000 extra jobs. Alternatively, you could use that money to create a larger number of jobs and you could predict that with more accuracy.

David Owen:  You are right to say that this is a new policy that has only just come into operation. It has not been evaluated and therefore its effects are less certain than those of policies that have been running for some time of which we have done evaluations.

Q 145

Stella Creasy: Is it possible for you to be absolutely confident that this will generate more than 2,000 jobs in the first year? That is what the calculation suggests to me.

David Owen:  I do not think that is a correct interpretation of the figures. There is no figure in there that represents the number of jobs.

Q 146

Stella Creasy: The £10 million would represent about 2,000. If you are paying a £5,000 premium in national insurance, that would represent about 2,000 jobs. That is the £5,000 each year that you are not getting into the Exchequer as a result of the holiday.

David Owen:  As I understand it, the £10 million you are talking about is part of the £40 million. That is the amount over the first year.

Stella Creasy: Yes.

David Owen:  That is an estimate. The extra costs that arise because of the compliance checks that Sam set out are not perfect. Some businesses will benefit, although perhaps they are not in the right region or they are not genuinely new businesses, or they relocate solely because of this scheme. We do not think that that particular effect will be big. That is what that represents. It does not represent our estimate of how many genuinely new jobs will come out of it.

Q 147

Stella Creasy: The Minister says that this is about new start-up businesses and job creation, but that is not what you have just said. You have said that this is about changing people’s use of the national insurance scheme, and where that might then influence and excite businesses.

David Owen:  I am clearly not expressing myself very clearly. I agree with what the Minister said. I think there is confusion because there are two different types of behavioural effects. The direct behavioural effect of the figures that you are talking about—

Stella Creasy: That you put forward in the memorandum.

David Owen:  Yes, that is correct. It represents the compliance behaviours. It does not represent new businesses starting up.

Q 148

Stella Creasy: It would be incredibly helpful if you could write to the Committee setting out what actual impact you expect—you have predicted and analysed this policy—in terms of generating jobs. If the proposals are about generating jobs, as the Minister has set out, we need to understand better, because that calculation implies a very high cost for introducing this scheme in relation to what you actually get out of it.
Your comments on compliance lead me to my second batch of questions, which are for Mr Mitha. I want to go back to the point about the number of businesses that have applied so far. You are looking at about 1,100 in the first quarter. So if we said roughly 1,500 a quarter, on that kind of trajectory over the next three years, you are looking at about 18,000 businesses being part of the scheme. You are talking about a target of 400,000. How are you expecting to get from 18,000 to 400,000? That is a very low trajectory to go for.

Sam Mitha:  To be absolutely honest, we had always worked on the assumption that we would not get very many applications to begin with, because anybody setting up a new business is obviously going to be focused on keeping their head above water and on their business. There is a cycle to how new businesses approach HMRC. They need to approach HMRC to set up their pay-as-you-earn schemes if they are planning to take on employees. They need to find out what their record-keeping obligations are. But the majority of small businesses rely on their professional advisers for information about what they need to do and when they need to do it. New businesses normally speak to professional advisers when they start up, or often to banks, or employer bodies or whatever. Information about the scheme is something they would have early on, which would have an impact on decisions about how many employees they took on.

Q 149

Stella Creasy: I appreciate that. The modelling that you have done, on this current trajectory, means that only 18,000 businesses will be part of this. What is the model that you have and where do you expect the increase to come? Is it at a particular time of year, or a particular experience? Can you give us a little detail about where you predict that it will come from?

Sam Mitha:  I reckon we will get a large number of applications when people come to make remittances, because employers have to make remittances on the pay-as-you-earn that they have deducted from payments to employees. At that time, their professional advisers will probably tell them that they need to make an application if they want to withhold part of the payment. Similarly, when they come to do their annual accounts they will be told that they need to think about the fact they are entitled to this relief. But that is not to say that they will not already have factored it into decisions about the number of employees they take on.

Q 150

Stella Creasy: I am a little concerned that you use the term “reckon”. Do you have any research or evidence on which this policy is based to justify that target of 400,000?

Sam Mitha:  Quite a lot, because we deal with large numbers of small businesses, so we know roughly their relationship with us and when they make contact with us.

Q 151

Stella Creasy: One of my concerns is that the previous witnesses have all said that this will not influence whether people take on new employees. You do not have any modelling to the contrary that means you can reach that 400,000 target.

Sam Mitha:  We can draw on the evidence that we gather of the impact that previous changes in national insurance have had on levels of employment. We know of the experience of the earlier NICs holiday. This is a relatively new experiment. In a sense, we have had to rely on the information from past experience in coming up with information. The figures are based on the very best information available to us.

Q 152

Stella Creasy: So where did the 400,000 come from?

Sam Mitha:  It is the figure that was computed by our colleagues in knowledge analysis and intelligence in HMRC, who have access to all the information from tax and national insurance data over a large number of years.

Q 153

Stella Creasy: May I ask, just as I asked your colleague, for a note to the Committee? Could you publish the evidence on which that target is based? On the current trajectory, I have great concerns that you are not going to reach it, so it would be very useful to get the data on which you based that target.

Sam Mitha:  Most of the information that you are asking about is summarised in the impact assessment.

Q 154

Stella Creasy: So the model that you put together—not the reckoning—will reach the 400,000 target?

Sam Mitha:  Yes.

Q 155

Stella Creasy: What proposals do you have for action along the way if you are not hitting the 400,000? There is a big differential on the current trajectory.

Sam Mitha:  We are monitoring the number of applications we receive. Obviously, one of the things that we report regularly to the Minister about is the levels of take-up and what we pick up from our contact with employers and professional bodies. The proof of the pudding will be the numbers of people who take advantage of the holiday. They will be required to submit details to us of the deductions they are making in respect of the holiday.

Q 156

Stella Creasy: So you do not have any proposals to deal with what is at the moment a very low level of take-up? You are hoping that your model is right. You do not have a staging post in this process?

Sam Mitha:  We are monitoring the figures very carefully. The Minister is taking a keen interest in us reporting to him.

Q 157

David Hanson: I take it then, Minister, that there will be no problem in accepting new clause 1, which would require the annual publication of figures for business take-up by constituency.

Mr Gauke:  I look forward to the debate on new clause 1. You can hear my response then.

Q 158

Stella Creasy: I have to wear my Public Accounts Committee hat in this. I am a little concerned that the monitoring procedures that you are setting out here seem to be quite inert. You expect people to report to you and you expect the complexity of the scheme to mean that there is little chance for people to say, “I’m a new business and I’ll change addresses and suddenly I’ll become another new business.” There will be 240 people working on this scheme. What measures do you have to check proactively that claims are not fraudulent, or do you have anything in your model in terms of compliance? You said that it was process now, check later. Do you expect any of those 1,100 to be subsequently rejected?

Sam Mitha:  HMRC runs a risk-based assessment system for monitoring compliance which takes into account the information we have about how new businesses operate. It will take into account risk criteria that will be determined by reference to the provisions in the legislation and the information that our investigators pick up in the course of analysing the information on the businesses that have applied.

Q 159

Stella Creasy: What estimate of risk of fraud have you made within the scheme?

Sam Mitha:  At the moment, nothing beyond what we have already published. Our primary focus has been on making sure that we have the legislation ready and that we have guidance out for businesses, so that they can make applications as quickly as possible.

Q 160

Stella Creasy: So it is possible that the 1,100 could go down.

Sam Mitha:  The 1,100 will obviously have substantially gone up in terms of numbers by the time the risk assessment checks are undertaken, which is, typically, when new businesses send in their accounts.

Q 161

Stella Creasy: But it could go down—so we could see a dip before you get the curve on the model.

Sam Mitha:  At the moment, we are trying to focus on ensuring that people who are eligible are able to apply. We are fairly confident, because we know from past experience that the vast majority of small businesses are compliant and law-abiding. We want to make sure that they do not fall foul of any of our provisions inadvertently, by helping them to correct simple errors, or whatever.

Q 162

Stella Creasy: You cannot see any problem with the clauses about publishing all these data, in terms of compliance, the numbers of applications and the rate of growth in numbers of applications.

Sam Mitha:  It is not for me to comment on whether the amendments that have been suggested should be accepted.

Q 163

Jim Sheridan: If you cannot comment, will the Minister?

Mr Gauke:  We will look at the amendments when we reach them in the course of the Committee’s proceedings. I, as the Minister, will look at them all fairly and we can examine them in detail.

Q 164

Stella Creasy: But you have every confidence in what your officials are telling you about compliance—there would no problem in publishing.

Mr Gauke:  The advice that I am getting seems to be reasonable about the likelihood of businesses, essentially, trying to abuse the scheme by acting as phoenix companies or by relocating. Given that there is a cap on the possible benefit for any individual company or particular business, the incentives to act in a fraudulent way are somewhat limited.

Q 165

Stella Creasy: Of course, your colleagues pointed out that businesses will be self-reporting the name of their company and their address. Those two things are relatively easy—

Mr Gauke:  Yes, but you also have to have employees for whom national insurance contributions would otherwise be paid, who are getting the benefit of a start-up.

Q 166

Stella Creasy: So you will be monitoring the national insurance contributions.

Mr Gauke:  You have to have employees there in the first place. This is not, for example, a situation of MTIC—missing trader intra-community—fraud within the VAT system, in which someone might create phoenix companies or non-existent trades. Sometimes there is impersonation in the self-assessment form. We are not talking about repayments, as such; we are talking about not collecting national insurance contributions that would otherwise be collected, so you need employees there in the first place.

Q 167

Stella Creasy: It sounds as though you are making the case for all the data being published by saying how easy it will be.
I have some final questions, which are only for you, Minister. Why have you focused primarily on start-up businesses if the measure is about job creation? We talked earlier about the role of charities and the voluntary sector in job creation. Will you explain why you have chosen to exclude them from the legislation?

Mr Gauke:  The test is whether there is a trade, business or vocation. In the context of charities, for example, that would not prevent employees of a bookshop, which was created by a hospice, from benefiting from the scheme. You are right to say, however, that it would not include charities that do not have a business element.
We could have run into particular difficulties, where we felt that the scheme would have acted inappropriately; for example, if a household took on a cleaner or a nanny. It would not be carrying on a business, trade or profession, but it could be seen as being a start-up business, and the NICs holiday would apply in such circumstances. We wanted to narrow it in those senses, and the test of a trade, business or vocation is well established.
The purpose of the policy is to encourage start-up businesses and the creation of jobs. It is not specifically designed to help charities, but to help the wealth-creation sector in regions currently reliant on the public sector.

Q 168

Stella Creasy: Is that not a little against the big society though? If the big society is about all the wonderful voluntary and charitable organisations coming together to deliver public services—a piece of business for them—why should they not be seen as job-creation businesses as well?

Mr Gauke:  I do not think that it is against but, rather, neutral on that particular sector.

Q 169

Stella Creasy: It is abstaining. Is that what you are saying?

Mr Gauke:  The purpose is to help start up businesses. I do not think that it is doing any harm to the charitable sector. Clearly, if we were not to increase the threshold for employers’ NICs, that would have been damaging for the charitable sector, because it would cover all employers. However, the focus is to aid the wealth-creating private sector, so that is where the scheme is focused. If we took out the trade, business or vocation test, which is essentially the problem that charities have, we would be left with problems such as a household taking on a nanny and not having to pay national insurance contributions.

Stella Creasy: So, essentially, there is a value judgment—

Jim Sheridan: Order. The hon. Lady has had a fair run. As we have to finish at 4 o’clock, we shall now move to the final question.

Q 170

Mel Stride: Following Stella Creasy’s comments about the modelling, I want to be clear about your position, Mr Mitha. You are saying, as I understand it, that the model is well researched and that it is outlined in the impact assessment, so members of the Committee can look at it there. It shows non-linear growth in the take-up of the national insurance holiday, so we might expect a smaller take-up at the beginning, accelerating as the scheme takes off. The figure of 1,100, as the current level of take-up, is therefore not inconsistent with the model you developed. Is that correct?

Sam Mitha:  I would agree with that. The modelling is based on the very best evidence available to HMRC, and it draws on extensive experience of the impact of NIC changes in the past and on the very best academic evidence. Ministers have taken a close personal interest in the issue, so it is something we are keeping under review.

Jim Sheridan: As there are no other questions, I thank our witnesses for coming along. It has been very informative and I am sure that the Committee welcomes your evidence.

Ordered, That further consideration be now adjourned. —(Mr Goodwill.)

Adjourned till Tuesday 7 December at half-past Ten o’clock.